A tale of two markets – both contrarian plays

I spend much time reading MSM financial articles in order to judge prevailing sentiment (definitely not for trying to ‘understand’ the markets). I know, I should get a life.  But sometimes, a starkly bullish or bearish stance overall can point me to some terrific contrarian trades.

In fact, just scanning the article titles often gives the game away.  I like to follow Ambrose Evans-Pritchard (AEP) in the Telegraph.  He is a mine of information about the economic data (the ‘fundamentals’) and will fall over backwards to offer screeds of data to back up his views.

For instance, in reviewing the crude oil market on 20 March – when crude prices had just plunged from $55 to $48 and appeared in freefall – he titled his article “OPEC and Russia risk a lost decade as shale revolution spreads”.  Thus, the article appeared with the market firmly in a bear trend where I always expect very bearish articles to appear.

You can easily guess the tone of the article, can’t you?  In it, he points out that ‘the war of attrition is lasting far longer and biting deeper than the energy exporting states even imagined.’  And that Saudi Arabia has conceded that the production cut agreed by OPEC and others will almost certainly have to be extended and that stunned veterans fear that the global glut could drag on to next year.

As we well know from history, OPEC members have a habit of breaking production cut agreements made at meetings because of a desperate need for the revenue.

He also points out the incredible efficiency gains made by US frackers who are now profitable with oil under $40.  Output has jumped recently along with the rig count and crude stockpiles are historically very high.  The US is now an energy exporter which has not occurred for many decades.

Previously abandoned wells in Texas are springing back to life with companies ‘confident they will become the lowest cost producers in the global oil market.’

Wow!  If you took all of this in, you would rapidly come to the clear conclusion that oil prices will continue to be under severe pressure.

A news/fundamentals based trader would be shorting at $48 and looking for moves to well below $40.

But what would a technical contrarian based trader (such as myself) do?  Of course, we would be looking for a good technical reason to buy crude – and to set targets. And what could I find last week to support a contrarian bullish view?

I was counting the waves down off the recent highs and the count was clear – the final fifth wave was being put in a week ago.  If correct, I could expect a rally phase – and a great trade opportunity.

Here is the chart I sent to VIP Traders Club members on Friday 24 March showing the lovely short-term rally off the wave 5 low near $47 and a textbook Fibonacci 62% pull-back and bounce.

That was a classic long entry at low risk (a key requirement for me to recommend trades for the VIP Traders Club).

So how is this forecast working out? Here is the chart I sent to VIP Traders Club members on Tuesday 28 March

I have a lovely five down with a huge momentum divergence (which usually signals a sharp rally ahoy).  I also have a pretty blue downtrend line which had just been penetrated in a clearly bullish show of strength.

That enabled me to forecast two upper targets – at the $50 and $51 levels.  Remember, targets are simply likely price levels the market should attain.  They are sometimes turning points and sometimes they are steps along the way to higher prices.

So how has my contrarian forecast panned out?  Here is the updated chart

Bulls eye!  From our bold long trade a few days ago at $47.60 to yesterday’s close at $51, that is a nifty profit of $3.40 in precisely one week.

I have firm ideas on where crude oil is going next so if you like to trade energy markets, join us in the VIP Traders Club.  Details here.

Incidentally, as further proof that hedge funds are mainly trend-followers, not trend turners (as we are), look how they were positioned in the futures market just prior to last week’s upturn.  Here is latest data as of last Tuesday

The non-commercials are the big speculators such as hedgies and they swung quite heavily to the short side during the sharp decline, which the ‘smart money’ commercials did the opposite.  The hedge funds were blindly following the trend.

If that is all it takes to make huge profits, we would all be sitting on the deck of our house on our private Caribbean island sipping pina coladas watching the sun set over the deserted beach with only the large turtles dragging themselves back to the sea after laying their eggs in the sand.

No, trends continue on their way until they don’t.  And my job is to spot when they don’t – and ride that new trend.

The British Pound is rallying??

This is another market that must have the fundamentalists in a tizzy.  In recent weeks, all the talk was of the ‘weak’ pound that was destined to plunge below the 1.20 level soon.  The US dollar was ‘rampant’ and with the bearish ‘uncertainties’ of Brexit,which was formally triggered last week, why would the pound rally?

Of course, this kind of ‘analysis’ is like a red flag to a bull for your truly, and I set about looking for a technical reason to place a contrarian trade.

I have been working on the basis that the October Brexit bloodbath (if you were long, but not if short!) was the final wave 5 of a strong five down.  Of course, there is a possibility that it is better labeled as a wave 3.  In which case, we should expect new lows below 1.18 at some point.

But in the meantime, it appears the relief rally underway off that low could stretch much further.  Here is the daily chart

A few days ago, the market was declining in what I considered was an A-B-C and when it hit the Fibonacci 78% support level at 1.22 (my ‘last chance saloon’ for a rally), I advised a long trade – and since then, the market has complied with my roadmap.

In fact, the rally has been quite sharp and has made it to the upper blue resistance line – and this line could be the upper line of a wedge in formation.  Of course, a powerful thrust above it would set the cat among the pigeons in the bears’ camp.  But are there many bears  out there?

The latest COT data says there are with almost 4.5 times as many bears as bulls in the hedge fund fraternity.

Again, I have a firm idea of where this market is going, so if you like to trade cable, join us in the VIP Traders Club to get my real time trade ideas in this market and many others.  Details here.