Fusion Investor Chatbox

This chatbox is for fundamental, technical and related discussions on investing in Bursa Malaysia. Registration is required to join. Please email me at fusion.investor@gmail.com with your preferred name and password and I will inform you when registration is confirmed.

Disclaimer: As usual, you are solely responsible for your trading & investing decisions.

Sunday, June 29, 2008

Crude Oil Charts Update

Tracking crude oil price is one of the many popular topics in my chatbox for many reasons.

- Last year, it was indispensable if one owned and tracked O&G stocks (But relationship has "weakened" recently and was even "inverted" at times).

- Appreciation that higher crude oil prices isn't good for stock market from global inflationary impact.

- Appreciation that higher crude oil is not good for Malaysians in general via higher fuel prices.

- Superb trader Boon declared his long positions in his blog here (http://www.bhcinvestment.com/) and he has quite a following there and here too.

- Fellow bloggers Dali and Moolah also covers the topic in their blogs regularly. I think it's safe to say many other blogs including mine also covers the topic regularly.

- It is clear any serious stock investor and trader would be tracking crude oil prices regularly due to the important stock market impact, even though they might not have any direct positions in crude oil spot or futures contracts.

Well, it seems that this close tracking appears to have been vindicated some last Friday. On 27 June, crude oil broke out to a new high ($143) again, and closed $140. The weekly and daily charts below.



Some observations

Weekly chart shows continued Uptrend.

Daily chart is more interesting, as it tells you a bit more information.

One of the major tools of Technical Analysis is Trend Lines. As mentioned before, there are usually many ways to draw trend lines, and this case is no exception. Trend lines are important because they indicate both general price direction (up, down, sideways) and possible support and resistance levels.

Here, I've just drawn 2 out of many possible Uptrend lines. For simplicity, there is a shorter (approximately 1 month) and steeper uptrend line, which suggests possible support level of $135. There is also a longer (approximately 3 months) and less steep uptrend line suggesting stronger support level of $132.

Purist will argue that my 2nd trend line is not technically correct since it cuts the second point rather than touch, and I would not argue with them (smile). Don't always blindly trust what you read including here. Always exercise your own independent, critical thinking.

Despite possible disagreement with trend lines, one thing you can't argue is the way prices pulled back, which I indicated in circles.

There are 5 circles drawn. First circle in Feb 2008 is small and brief before resuming uptrend. Second circle in late Mar 2008 is typical W shape pullback, before resuming uptrend. Third in late Apr 2008 is also an interesting smaller shake-out. Fourth in late May 2008 is a much bigger shake-out. Note so far the pullbacks and shake-outs are spaced roughly once a month. But the fifth (and current June month) lasts longer than the 4 prior pullbacks, and the uprise gets harder and harder, and even last Friday's rise seems to lack the usual energy. This is of course evident to most practitioners, and should be taken as a warning signal.

The question now is how should one act if one is long? In view of the weakness seen that is weaker than prior pullbacks, does this means we should changing strategy and now try to sell at the top, i.e. attempt to pick tops and sell? Or do you still retain your discipline and only sell when the uptrend is over at much lower prices?

Is the uptrend is over? Technically, as a price makes a new high, we cannot yet say the uptrend is over yet. We have to wait for a confirmation before we can conclusively say it is over. The flip side of course is that when confirmation is received, prices are no longer near the top.

So, try to find top and sell at the top? Or wait for confirmation and sell at a lower price? Which should you do?

Much depends on your trading strategy, whether you aim to ride the big moves, or are trying to catch the smaller cycles. Both have their pros and cons, and some will tell you their methods are better than others.

The problem with selling at $140 is that if the price makes a new high, you will miss out on further uprise which can be significant. If your plan is to get back in at $142, you might risk a whipsaw. On the other hand, if you continue to hold on, you have to be prepared to see it fall back to $131. There is no free lunch, and this is what makes trading exciting.

Also, I expect those who bought it at much lower price and have held it over a much longer period (= the masters) will try to give this bugger more rope to move, since this sort of rise does not occur daily. My belief - true trend following traders like the Turtle Traders, Bill Dunn, John Henry, Ed Seykota, etc. knows that the big one is the one they must hold on, no matter how wild the horse bucks, because they know that their high returns depends on riding the wild horse all the way to the top - they may suffer drawdowns like 30 small losses in a year, to ride 3 big ones, and the 3 big gains is what they expect to give them an overall +50%, +80%, +100% return per annum after subtracting the 30 losses. They know that if they sell too soon, they will lose their position, and without a position, they cannot enjoy further uprise.

This naturally is not what the average trader does, and requires huge, huge nerves of steel and immense discipline, and in my opinion, is what separates legends like them and Jesse Livermore from the average trader. As Livermore likes to say, the big money is in the big moves.

the same time as prices get higher and higher and especially when prices are no longer justifiable and nearly everyone wants a piece of that action when buyers are nearing exhaustion, the masters tighten their stops, rather than giving a bigger rope. The million $ question is when do you tighten the rope and when do you give a bigger rope? This is not an easy question to answer if you are a discretionary trader, but is already answered if you trade your mechanical system. For the latter, you simply must follow the system that you knew worked.

Should I short this bugger? I think not yet ... at least, not June 27. Will have to see how June 30 goes first. This is the good thing about trading. As Buffett likes to say, investing is like playing baseball, except you (as the batter) don't have to swing every time, and you never get sent out after 3 strikes. If June 30 is not good, wait for July 1, and if not good, wait for July 2, etc. Be patient, and wait for the perfect pitch.

Disclaimer: I
am not a futures trader, only a pretend one, so, treat this as merely one observer's blabber and mumbles (smile). As usual, buy, hold, sell at your own risks.

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