Monday 4 January 2010
One thing a savvy trader must understand is that smart money, [our
descriptive adjective for controlling nterests in a market], does not like
company. What does that mean? When a move, up or down, is about to
commence, it goes quickly giving little opportunity to join in, for smart
money is in control.
Why does smart money behave this way?
We are using the daily Crude Oil chart as a recent example. There was a
sharp rally that began in September that was virtually uncorrected from 67
to 83. The reason is that smart money is going to punish shorts in a rally,
forcing them to pay up as price works higher. Forced out shorts become
buyers that helps fuel the rally. New buyers, those wanting to establish a
long position, do not get any pullbacks to buy at a “safer” price level. By the
time new buyers realize they have missed the proverbial boat, the weak-
handed buyers start to jump in before they miss out entirely on the move.
Where do these weak-handed buyers decide to join in?
Near the highs, exactly where smart money starts to take profits, maybe
even go short. What happens to the last-in buyers? Crude underwent a
correction from the mid-October highs to the mid-December lows, wearing
out most of the longs. This kind of process repeats itself over and over in
most all markets. In fact, it repeated again from the mid-December lows
as Crude OIl embarked on a current rally from 71 to 81, a $10 move. It
was dicey around the 74 level, but once price cleared the brief congestion, price
did not look back. Every day was a higher low, higher high, and a higher close.
There were a few clues prior to the recent mark-up. Note the sharp volume
spike on 9 December, when price broke the “Dubai” lows. That was followed by
three lower low closes, but the downward progress has slowed, considerably.
This clustering of closes and shortening of directional movement are red flags,
warning of a potential change. [See Crude – Cruising On Cluster Closes]
Price then moves into the congestion area between 71 and 75. This provided
another clue, by virtue of the overlapping wide range bars moving sideways.
This activity tells us there is a tug of war going on between buyers and sellers.
Weak buyers had already been washed out on the decline, and any remaining
longs viewed this rally as an opportunity to cut losses. Shorts see price has
broken under support, and this rally is an opportunity to sell at higher prices.
Get the drift?
How do we know that there is a concerted effort to affect price movement this
way, other than knowing it has been going on for over a century in US markets?
Look at the way price is cutting through all of the previous activity from October
through November. Normally, this kind of trading range becomes an area of
resistance, as buyers try to overcome sellers for control. Here, there is no
resistance, smart money is totally in control and dictates the movement of price
direction.
If you draw a mental line across 78.00 on the chart, from October on, the
preponderance of price activity occurred above 78.00 for about seven weeks.
On the far right, price has cut right through in just five trading days. When did
the move begin in earnest? The day before Christmas, when many traders were
on vacation, [including us], or not willing to take a position over the holidays.
Here is a classic example of how smart money never sleeps. Holidays? Not for
them. Not when there is an opportunity to catch everyone unawares. Look at
each rally. Where would you decide to get in, and where would you place a stop
that did not entail thousands of dollars at risk? The irony of all this is that just
jumping in is the “safest,” and about the only way to get in.
We had been following and “reading” this market for a few months, advocating
from the long side, without taking a buy and hold, or riding through the
correction, but biding time to get long when it was opportune:
Crude Oil – To Rally Or Not To Rally? Why We Love Pictures!,
Crude Oil – A Message From The Market, and Crude Oil – Trend Remains Intact
are but a few example of how we had been viewing Crude Oil from the long side,
given present tense market behavior.
Take note of this kind of behavior for you will see it again and again. How to
participate is the challenge!
