I wanted to review Crude Oil (this blog) and Soybeans (next one), the two hot commodities.

In the case of Crude Oil, let me say I am indebted to Gann Global (http://www.gannglobal.com/gateway.php) . I have a reasonable data base but it is nothing compared to Gann Global’s. I subscribe to their services because of the raw information they provide.

If we look at a Crude Oil chart since inception, we go back to 1983. Let’s say I want to calculate a mean impulse move in the 12-Month swing (yearly trend), Figure 1 shows that a 5-year low took place in February 1999 and since that low we have had 2 measurable impulse swings - hardly an adequate sample.

FIGURE 1 12-M Crude Oil

The reason I want to calculate the stats? The move since January 2007 looks like a blow-off wave. I want to know if it is still high risk to contemplate an entry at these levels. You will recall I had posted a blog explaining why I had exited all longs at around 137.00

Gann Global came to my rescue - they provided the information I required. The approach they took was to measure the equivalent of the 60-month swing for all commodities and came up with a sample size of 67. Based on Pete Steidlmayer’s method of calculating the stats, mean +1 standard deviation came in at ‘290% increase to 729%’; ‘mean +2 came in at 728% to 1020%’; ‘mean +3′ came in at 1021% and higher. Since the start of the 60-M swing, February 1999, the increase has been 1092%, in the mean +3 category.

Theoretically, therefore, Crude Oil has less than 1% chance of continuing its upward climb. On this alone, I would say that to enter now would be a high risk entry. In addition, since it made a high on June 6 2008 at about 139 (basis CSI’s Perpetual Contract), Crude has been struggling to move higher. Finally, we can’t get away from Crude in the news; it’s everywhere: TV, magazines, papers etc.

There is another point I’d like to mention, because this is a blow-off wave, I expect the market to break sharply once the high is hit. Figure 2 shows the type of price action I mean.

FIGURE 2 Soybeans 12-M

This is not a recommendation to go short. There is no pattern to suggest a change in trend is imminent. Before going short, I would need to see an 18-d Lagging Change in Trend or at least a 5-d Forecasting Pattern (see Nature of Trends). However, given the maturity of the 60-month uptrend, now is not the time to rejoin the fray.

By the way, as an observation of my own trading, I tend to exit at the end of a secular trend 3 to 9 months too early. In the US stock market, I exited all positions in July 1999; the final top in the S&P did not occur till March 2000. I tend to misjudge the madness of crowds. As Lord Maynard Keynes once said: “The markets can remain irrational longer than you can remain solvent”.

So, don’t go shorting Crude Oil, at least not yet. If long, make sure your stops are in!

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