Wasn’t that a terrific Black Friday? There were bargains galore – but the best one was surely in crude oil! Down over $3 again. Recall back in September, I was mapping the rally to my original $80 target zone in US crude and as it rose above $75, my finger was poised over the ‘sell’ button. Bullish sentiment was flying high and $100 was a cinch (or slam dunk, if you prefer), wasn’t it?
And as it hit my target upper tramline at $77 on 3 October, I acted as a true contrarian would. This was the chart I posted on my 3 October Trade Alert to VIP Traders Club members:
and this is the updated chart on the daily
I had an idea the lower tramline would be achieved in due course but the speed of the decline beyond it is taking my breath away (and I am sure I am not alone in this). But why was I so bearish at the $77 high (while everyone else was so bullish with hedge funds at almost 10/1 long on COT data?). Here is your answer – on the long term weekly
I am sure you remember the huge crash in 2014 – 2016 when the market plumbed the sub-$30 depths as Saudi oil came flooding into the market in an effort to crush the US frackers. Well, that didn’t exactly work out as the latter is now a major force in the oil industry. They managed to extract oil at much lower cost than previously.
But crucially, I noted the decline was a lovely textbook impulsive five down affair and advised Club members to go long at around the $30 area. This was a classic “Buy low, Sell high” ploy and we rode the waves up to the $77 high region. Note that this was not only on my upper tramline but was the precise Fibonacci 62% retrace of the previous wave off the wave 2 high.
In fact, it was a pretty low risk trade with bullish sentiment off the scale. But now, going back to the daily chart, it has reached the Fibonacci 50% retrace of the 2 or B wave up off the lows and should at least pause here or perhaps at the Fibonacci 62% at around 46.50 region. I am unable to be too precise because this is a very spiky market with lots of overshoots.
But is this an outbreak of the Saudi- Fracker War Mark 2? Are they again trying to crush the US frackers? I read that break even for the latter is just above $40 (the Saudi cost of extraction is almost nil). Whatever the motivation behind the selling, it is fierce and a direct result of the lop-sided bullish fervor of the hedge funds (and most others) at the top. They are now llquidating with intent as they are caught on the wrong side – again.
And what a terrific example of my general rule that when the hedge funds are maximum bullish, expect a severe reversal. They had a great story to project $100 oil (and beyond) and many were sucked in by this. But it was a siren call that lured many into major losses. This is a process that keeps repeating time after time.
Sadly, the US government is shut down for Thanksgiving and there was no COT data issued yesterday. The latest figures will make interesting reading next week I am sure.
Finally, please note that my correct analysis had zero input from industry data (you can get that in plenty of other places). All I used was a reading of the charts with my Tramline Trading method and sentiment. I know nothing of the details of the oil industry (and really don’t want to know as this might sway my judgment). In fact, the chart could have been of another market altogether (such as soybeans, for example) – and I would have arrived at similar conclusions.
Natural Gas is hot….
Another energy market I have been trading is Natural Gas and while crude is sinking, this market is flying in comparison. It is mainly used for heating of buildings and the current early hard cold snap in the US, has lit a fire under this market. But I first became interested earlier as I perused the long term chart (I always start there)
In recent years the “floor” seems to be around the 2 cent mark which is when there is a glut. In the summer, it has risen in a clear five up that gave the clue the trend was now up and it was just a question of timing of my long entry. I had a pretty long wait – and here is why
From the five up in 2016, the market moved down in what is now a beautiful wedge/triangle with the required five sub-waves and when the market broke above the upper line in September, that’s when I had my entry at just under the 3 cent mark. And from then, it has been straight up as the base of supply formed during the wedge has provided the short-covering fuel – plus new buying.
At least one large hedge fund has blown up by betting the wrong way – they had a hedge long Crude oil/short Nat Gas. One glance at the above charts will show that was a suicidal play. We call that a ‘Texas hedge’ which is in the same spirit as a Chinese Cut in cricket.
And these losing trades had to be unwound – and has added to the downward pressure in crude and the upward surge in Nat Gas. Nice for us but the fund investors not only lost all their investment but are on the hook for the huge net losses.
Moral: Do your own research, do not invest in funds and use stops (as we always do).
If we get a ‘normal’ spike this year, my initial target is the 6 cent region.
….While stocks are not
As you know, I have been maximum bearish US indexes since the ATHs were put in on 3 October (a date I am sure will go down in stock market history). And my stance is being truly validated with huge daily losses since 8 November. Here is the Dow daily
VIP Traders Club members know that I have been able to accurately negotiate the many twists and turns off the ATH, especially the purple wave 2 whose high i nailed precisely. That gave us a great opportunity to add to our shorts.
Now, I have an excellent tramline pair (with bearish ‘overshoot’ on the final wave 5 of 5) and yesterday the market is looking at the lower line again. If my labels are correct, the current wave 3 down should have plenty of energy to push it below the lower tramline – and that would be a significant event.
It should wake many bulls up to the realisation that this is not a dip to buy as they had assumed, but an urgent invitation to bail out pronto! In fact, it will be what I call a light bulb moment which can occur roughly half-way along the third wave. If this applies this time, my target is the 20,000 – 22,000 region.
One word of caution: DSI bulls number only 8% so counter-trend rallies can be on the cards.
Can’t wait for more bargains on Cyber Monday!