The oil price is suddenly hot news – has it topped?

Yes indeed, the surging oil price story is all over the media with forecasts for $100, $150 and I even saw one for $300 yesterday as they come out of the woodwork in a torrent.  It appears everyone is finally on board the bull train now.  And that is precisely why I am seriously questioning the bull story.

After all, I am a fully paid-up contrarian and the current setup seems to be an ideal candidate to practice my art!

Just today in the MSM Telegraph Money section appears an article headlined: Oil price surges – how to invest through your ISA or SIPP.

If my top-of-the-market indicator is working correctly, that one headline could well be the bell rung at the top.

It is a very common theme.  When a bull run has been operating for months (and sometimes years), the idea of investing in it which is aimed at the ‘little guy’ is a sure sign the trend is about to change.

Basically, MSM readers and ISA and SIPP investors are pretty unsophisticated in the perverse ways of the market.  They are usually very gullible and soak up convincing stories that hold out the promise of huge gains on an established trend that has already seen large gains.  After all, the market is advancing strongly and they don’t want to miss out (the infamous FOMO effect).

What they don’t understand is that they are not alone!  The herd mentality is working overtime and now there are just too many on one side of the boat.  And we know how that usually turns out.

I mentioned last time the extreme lop-sided COT data showing hedge funds are ten-to-one bullish. So not only are SIPP investors overly bullish, but so are the professional money managers. That’s a full house in my book.

I used the very same contrarian considerations in early 2016 when oil was plunging and hedge funds were massively short.  That is when I established my upper target at the $70 zone (with a possibility for a move to $80).  And the market hit my target on Monday.

Of course, it has not been an easy straight-line rally off the $28 lows!  Far from it.  In fact the period June 2016 to July 2017 was a nightmare to trade with whipsaws common.  I would guess that not one oil market bull in 100 has held on for the entire two-year rally.  I certainly didn’t – but that is because I am a swing trader, not a long-term investor.  But I did manage to catch many of the major swings along the way – and especially the last rally phase where the trend was solidly up.

But what about now?  This is the chart I showed last time

and this is it updated and I have amended blue tramlines to fit earlier touch points better

So now at the $70 target, the market has hit that resistance and also that of the tramline – a doubly powerful hurdle to jump over.  And my Elliott wave labels show that we are at or near the end of purple wave C of red B.  If so, the move down in red wave C will be intense.

Here is the short term picture

I have several pink tramlines working and last week’s push above the $70 level (and the blue tramline) could turn out to be one of my famous “overshoots”.  Recall I found such a beast when I made my successful call for the top in GBP/USD last month.

A decline next week should seal its fate.

Going back to the extreme bullish forecasts in the MSM, I note Bank of America says ‘oil risks spiking to $100 next year’  Standard Chartered sees oil averaging $68 this year (which means it must rise to at least $80 at some point). But the oil market has always been about offering a whole lot of pain to the majority.

And now the majority is overwhelmingly of the belief that the price can only rise (as they did at the tops in 2008 and in 2014 for various reasons.  And this throws up the most important point of market forecasting.

A good trader watches what the others are doing

To be successful (a lot of the time!), just pay attention to what others believe, not your own personal opinions.  Amateurs (and most professional) market participants believe they have to figure out what the supply/demand stats and geopolitical issues mean for the oil price. That is a grave error.

Why? Because you always succumb to the unconscious herding conclusion that everyone else has reached.  This is a rational conclusion alright – and it is always wrong at major turns.

Rationality has little place in markets (except after the event, of course). Financial markets do not behave as do economic markets, such as for bread, or toilet rolls.  Without government interference, economic markets obey the basic supply/demand law as taught in Econ 101.  Financial market do not.

As the price of a stock rises, demand increases, not decreases as it would for bread. That is totally contrary to the law we are all familiar with for bread and goods and services.  Too many economists do not see the distinction and use highly advanced mathematics to justify their erroneous conclusions (and blind us with science, as the saying goes).

Of course, the motivations for buying bread and for buying stocks are totally different – and this key observation is missing in most conventional analysis.  Behavioral economics is an attempt to understand human motivations in the markets.

No, the way to success is to try to be a neutral observer and see what the other traders are doing and how they are acting.  I use the simplest tools for this, such as momentum divergences, COT data and my own Headline Indicator.  And not to marry a position or market stance and to keep checking market performance against your projections.

I really like trading third waves and seek them out at all times. They are usually long and strong and have few minor corrections.  Ideally, your protective stop is never in danger of being hit. My recent call at the top in sterling (see recent posts) is a case in point where I jumped on a third wave early in its development.

Have the Cryptos had their day?

One of the foremost leaders of the mania for investing in assets (from art to stocks to vintage motorcycles to footballers) has been the remarkable phenomenon of crypto-currencies.

Incidentally, a friend recently attended a vintage motorcycle auction where an iconic 1950s Vincent Black Shadow that was partly restored and the rest in bits in a box sold for over £100k.  Hmm.

And today I read that top Premier League footballers are being paid eye-watering amounts of over £100k a week plus bonuses for just showing up to a game of £75k and added bonuses on performance.  I think I’m in the wrong business.

Back to the equally insane world on cryptos which I have been trading both from the long and short side.  But here is my most bearish take:

The recent rally to the Fib 62% retrace on a momentum divergence and the upper wedge line at the round-number $10k retrace was the kick-off to the renewed slide last week.  Incidentally, the $10k level is the Fib 50% retrace of the entire decline off the 17 December top – and a great place to stage a turn.

If I am correct, I expect an eventual test of lower wedge line in the $6,500 area and then a break to much lower levels in wave three of three of three.  Exciting times lie ahead in cryptos and oil!