Are wrong thinking people right?

As a true geek, I spent my youth (and adulthood!) watching all of the Star Wars, Star Trek (all generations) and Terminator shows. I also listened to Monty Python records, and their movies and shows. Yup, I was (and still am) a full-on nerd. Todays title comes from a Monty Python skit where someone  said  “I’ve met a lot of people, and I’m convinced that the vast majority of wrong thinking people are right!”. This Monty Python line came back to me recently when I looked at the number of polarized opinions on the direction of oil Everyone has an opinion on oil. The vast majority of wrong thinking people will, at some point, become right thinking people in the current erratic environment for oil.

Monty_Python_Series

Recently, when oil bounced off of its $44 support level, I noted on this blog that I would enter a long trade if that bounce could hold for 3 trading days. After 3 days off of the $44 low, I placed an order for USO (US Oil fund) at $16.95 (oil at $47) in the ValueTrend Equity Platform, as I noted was my strategy:

How to play oil

Yesterday, we exited this trade by selling USO at just over $19, given the fact that WTI spot oil hit our target price intra day of $54. A three week profit of 13% was plenty – given the risk reward scenario for crude at this time. Momentum indicators were getting a bit peaky at our target level, further inspiring our sell decision.

 

The chart below shows us that oil is coming into some strong resistance at $54 or so. Should it break this level and hold over $54 for more than 3 days, there may be considerable upside ahead. . The bulls and bears are plentiful on WTI right now – and it is my opinion that waiting for a breakout through $54 resistance may be a high risk trade – especially for those who followed my trading advice on playing a bounce.

oil short

You may choose to hold your oil exposure and see if it can break $54 resistance. That position may be rewarded if resistance is penetrated. My problem with staying with the trade is the risk / reward tradeoff. The risk of seeing crude return to $44 is as great or greater than the upside reward potential of a meaningful penetration through $54.  The problem, then, is the number of wrong thinking people who may not be right!

8 Comments

  • I agree I am shorting near 54 with a tight stop above. Until oil proves it can break 54 I am trading this low 40’s to 54 range.

    Reply
    • Yes we hope to see another decline to $44-45, and will play on another bounce, if there is one.
      This type of pattern can be a very rewarding environment for those of us who use a disciplined approach to technical trading strategies.

      Reply
  • If you were to use stop losses, where would you place your stop loss on a high risk trade like this one.

    Reply
    • I originally outlined in my trading strategy blog that a break below $44 is bearish. I don’t use stops–you want 3 days to prove a break or bounce. Stops will whip you out on day 1–which can be frustrating if its a false spike.

      Reply
  • Hi, Keith
    How are you? Like your blog very much!
    Just a question about your “3 day hold” rule for a breakout or bounce, you use the lowest price of the 3 days or the closing prices to compare the resistance or support level?

    Thanks in advance!

    Reply
    • Hi Jane–thanks
      I use the 3 day rule off of support. so in oil’s case–support is $44–so a bounce off of that by 3 + days is bullish, and a break over 3 + days may be bearish.

      Reply
  • Hi Keith,

    Could you provide a comment on the mining sector in Canada. The $sptmn index seems like it may be forming an inverse head and shoulders pattern. Copper has had a bit of a rally, just wondering if you think the rally in copper has more legs, and is that the driver for the mining index?

    Reply

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