Crude oil trading has been tough for months

With markets seemingly on tenterhooks waiting for the results of the French elections tomorrow, I thought I would show you my analysis of my trading in the crude oil market, which is a market of interest to most traders and many others.

Incidentally, although we may see a nervous and volatile session in the euro when Asian trading begins tomorrow evening, the overall trend in EUR/USD is down as the secular bear trend has not completed.  The recent appreciation of the past few weeks has been a corrective rally in this bear market.  I would consider any near-term rally as an opportunity to short.  I am looking for new lows below the 1.0340 January low in due course.

But today, I will cover my latest trade in the crude oil market, which has proven extremely difficult to trade as it has been swinging up and down in large waves in quick succession.  And I will reveal my thought processes as this trade developed.

To set the record straight – I am a swing trader.  That is, I attempt to catch the sometimes large swings up and down that are the most common patterns.  I am not a position trader – who enters a position and ride it through all of the often large ups and downs and exit some months/years later. We are dealing with leveraged positions and even a small adverse move can wipe away any profits accumulated.

I am not a day trader – that way lies madness (and likely wipe-out)!

Also, I like to keep things as simple as I can and do not concern myself with the ‘news’ except to note how bullish/bearish the MSM appears to be as a measure of sentiment.  That applies to Bloomberg. the WSJ, the FT and seekingalpha.com.  I believe most of what I want to know is contained in the price patterns (and COT and sentiment data).

Back to crude – I reckoned that it made a major low in a large wave 3 at 27.60 in January 2016.  Prices had been tumbling in a relentless bear trend since the $112 high in August 2013.  But I believed the market would stage a wave 4 rally off that low that should last many months.

I don’t know about you but trading waves 2 and 4 are nightmares to trade. These are counter-trend to the wave 4 trend, but trending with the one larger trend.  You would think that trading with the major trend would be relatively straight-forward – this is what we are taught in the trading textbooks – but not these waves. The fact is, sudden turns are upon you and you are left with either a loss to your stop or at best at break even.  All of the energy you devoted to analysing the trade was for naught.

So, with this knowledge, I was determined to seek out only the uber low risk, high probability trades and to keep a strict eye on my stops.  With the collapse of prices from 110 to 38, I felt sure the relief rally, when it came, should produce a move up of a few tens of dollars.  In fact, I had a clear target area in mind from the time the market started the wave 4 up in Feb/March last year.  Here is the weekly chart showing the setup

The simplest form of a fourth wave is a A-B-C and when the market seemed to trace out this form by January of this year, I felt I had an excellent candidate for a wave C of 4 high – and  it was right at t he Fibonacci 78% resistance (yellow bar).

And that illustrates my practice of always setting out my Fib levels whenever I believe a major high or low has occurred.

And that high at the $55.70 level on 3 January was pretty close to my original target in the $60 area which I had set way back last year.  That $60 target wasn’t picked out of the air!  It is a curious fact that many relief rallies in a bear market (and vice versa) turn around in the region of the fourth wave extreme of the previous wave – in this case, the $60 area.

So was that high at $55.70 enough ‘in the region of my $60 target’?  Time will tell, but I decided not to take any chances by holding out for the $60 to take profits.  I was not about to ride a nice trade towards my target that was never hit and ride it all the way back down again.

Of course, by the time the C wave was in, I could draw a very reliable green uptrend line across the major lows that possessed three accurate touch points – and that was enough to give me high confidence it is line of very strong support.  It also had a nice Prior Pivot Point (PPP) – see my text pp 52 – 53 – that added to its authenticity. This line will feature strongly in my trade.

Here is the situation at the C wave high in January

I could draw a clean minor uptrend blue line across the minor lows and when the market broke below that, that was a clear shorting signal at the $53 area.  And when the decline brought the market down to close to the green support line, I decided to zoom into the short term scale (4-hr)

In early March, I could easily see that the decline was impulsive (going in the direction of the major trend) and hoped the final fifth wave would terminate at the green support line in the $47 area.  And towards the end of the month, that is precisely what happened.  It hit my best guess target.

But I didn’t want to exit my shorts, reverse and go long right away – I needed to see some basing action first.  I have seen too many instances where markets just keep moving way past where they ‘should’ turn.  I reckoned that if the green support line was still good, any bounce from there would likely be strong.  But if the market blasted right past that line, all bets were off.

There was a huge momentum divergence at the wave 5 low and that gave me hope that the market would turn there.  I waited a few days to see if a tradable pattern emerged.  And it did:

I could then draw two minor blue trendllines (at bottom left) and when both were penetrated from below, that was my signal to go long and cover all shorts.  I was able to use a tight stop on my new longs because if I was correct, this rally should be sharp as it is being boosted by the strong green support line.

Then in April, as the market just kept moving up, was my $60 target back on the table?

I was able to draw in a very nice pink trendline of support and resolved to exit my long trade when that line was broken.  I was not going to wait for that question to be answered with a $5 profit in the bag! This break occurred on 12 April and I managed to take that $5 profit on that little excursion.

The other reason to expect a top there was the kiss on the blue trendline.  And after a kiss comes…?  A Scalded Cat Bounce, of course!

And in the last few days, the market has dropped back hard to the $49 – $50 area, which is the Fibonacci 78% support level.  I will now watch market action for signs of basing at this level in readiness for a possible rally phase.  But with the market close to the green support line again, I am keeping the option open of a break of this line – and that would likely give me another trading signal.

Of course, some traders in the VIP Traders Club like to trade my Split Bet Strategy and they will have taken partial profits near $53 and left the remainder open with stops at break even (using the Break Even Rule).

In this campaign, there were only two sensible places to enter trades in the last 2-3 months to catch a swing.  Patience is required.  And  it is not necessary to be in the market at all times.  Sometimes, it is best to sit on your hands and just watch for those very low risk/high probability setups that come along.