I noted on November 6th that the price of oil was moving through $56. I suggested that oil would be a good trade if, and ONLY IF it remained above $56. Note that the breakout point is actually $55 on this chart, but $56 remains a more comfortable barrier over that prior wall of resistance. My view is trade the higher price point for better assurance in a volatile security like oil. If you have read my book Sideways (may I humbly suggest you do so ) you will recall that I use a three bar rule to trade. The minimum allowed time to place a trade – that is, a buy or a sell – must be three bars AFTER a breakout, breakdown, or test of a trendline. If you have a high confidence in the trade, you can place the order after 3 days of the move (this applies to a stock, bond, or commodity). So you can trade on day 4. If you are a little hesitant, you can wait longer. In fact, you could wait up to 3 weeks (3 weekly bars) if the trade is to be a significant size or if you are trading in macro time cycles.
My suggestion was to wait at least three days for oil to hold over $56. Let me emphasize something again. The rule is to wait AT LEAST three days. Somebody wrote a comment asking if I would buy the breakout. I said I would wait until at least that Friday or Monday following November 6th (Friday was day 4- my minimum wait period). Remember, the 3 day rule is not saying you MUST buy on day 4. It’s the earliest date. I decided it’s best to see if oil can pull back from its (then) overbought situation – yet maintain its $56 level. As it fell, I wanted proof that $56 would hold. I’d rather buy on the test and bounce. Yes, a bounce off of $55 might be a valid buy point, given that it’s a better representation of the ‘true” former resistance point. I’m a conservative trader, so I’m inclined to wait for proof of support at $56, although you might be comfortable with $55. Anyhow, I have yet to buy into the oil sector. Although I must say I am keeping a keen eye on it.
What about the fundamentals?
At ValueTrend, we trade stocks on technicals, and fundamentals. Fundamentals matter when it comes to an individual stock or sector. When it comes to commodities, fundamentals and news headlines are pretty unreliable.
For example, data came out not too long ago showing that shale output was slowing – this drove oil prices up.
Today’s news: the International Energy Agency is saying that forward demand for oil is likely to be lower by some 100,000 barrels/day. This is driving prices down.
OK –so which is it, fundamental followers?
Lower production = higher prices?
Lower demand = lower prices?
Given the opposing news headlines presented above – What will the news and fundamental assessments for oil be 3 weeks from now? It’s kind of laughable – when you think of the “turn on a dime” “logic” behind news–based oil trading. In my experience, the only thing you can trade off of in the world of commodities is the charts. Follow your trading rules surrounding your observations on those charts.
Keep an eye on oil. If it finds support soon, I will wait for 3 + days – preferably off of at least $55, and consider a trade. Until then, oil remains outside of my buy rules.