The three-bar rule applied to the oil trade

November 15, 20174 Comments

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?

Or…

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.

4 Comments

  • Hi Keith,

    It’s kind of hilarious how today (Friday) the market is making it perfectly difficult to decide what to do, especially for those of us who are itching to get into the trade. WTI is up 1.2% and now between those 55.00 and 56.00 levels.

    Looking at the sector ETF ZEO.TO, it seems like such a perfect time to buy. We’re making a third higher low and the 50 day moving average is at 40 degrees upwards and not far from the 200 day moving average.
    Will it get rejected?
    Will the price go through 56.00 so hard that it’ll make it difficult to get in?

    Re-reading your blog, I think I will control my itch and will buy the day ZEO.TO closes above 11.00, which is actually only 3 pennies higher!

    On the other side, the 200 day moving average is not yet pointing up, so it’s not idea. I like when it’s flat, at the least. But if we wait for it to curve upwards, the price of WTI will already be at 60.

    Tricky tricky.

    Another idea is to not bet on the sector, but bet on the TSX index. Possibly better for conservative investors, even if the idea of buying Canadian banks feels wrong at this point. Seasonality shows that they weaken after December, plus, our crazy housing market and the new stress test beginning in 25 trading days.

    Would love to hear what you think of any of this.
    In any case, thanks for your blogs Keith!

    Reply
    • Matt–this is an excellent commentary – well thought out points. I hope lots of others who read this blog take note of your observations. My sentiments line up with your own. Its a little tricky, this trade! I saw $55 hold, and today its into $56 again. I do think i will buy on monday – at least one initial leg. That is, if things don’t reverse on WTI’s price over the weekend. I’m going to tepidly step in on this trade – a little at a time. Its a hard situation to read, and I think you nailed it with your observations (Looking at XEG, which is traded widely, 200 day SMA has been overcome but its not yet flat, and boy there have been somereal up/down head fakes on oil this week!)
      Thanks again.

      Reply
      • Thank you for the kind comments Keith.
        Through pain and study, I suppose I got better.

        Monday WTI closed > 56.00 and today we’re getting some follow-through, with WTI near 57.00 at 11am. The energy ETF ZEO.TO is bouncing higher on the lower trend line of that rising channel we talked about above. It seems today late afternoon (in case the rug is pulled before the close) is a good time to buy some energy stocks.

        Unfortunately I have quite a bit of exposure already, having bought what was a failed break-out a few months ago, so all I can do is grow my position by 5%. Lucky are those who are still underweight the sector!

        Reply
        • I just put a 5% position on today. That’s it for now- although with follow through after the OPEC meeting on November 30 it will be interesting to see if the move extends, or fails.

          Reply

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