Tue 15 Jul 2008
Crude Oil - Wither now?
Posted by ray under Market Commentaries
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!
July 15th, 2008 at 12:14 pm
Ray
Here is one headline:
“Gas Now So High, Stations Are Running Out Of 4s”
With gas prices shooting well past $4 a gallon in the U.S., filling-stations are facing a fresh crisis: even after upending their storage closets, they are experiencing a shortage of extra 4s to display on their pumps.
If 1 is the loneliest number, then 4 is the hottest — at least when it comes to gasoline.
With regular gas in New York City at a near-record $4.40 a gallon, station managers are rummaging through their storage closets in search of extra 4s to display on their pumps. Many are coming up short.
July 16th, 2008 at 4:50 am
Ray
SEC extending rules to naked short selling to all markets, as per FT news:
Published: July 15 2008 21:31
US regulators will take emergency action to stop abusive short-selling of stock in financial institutions such as mortgage financiers Fannie Mae and Freddie Mac and investment bank Lehman Brothers.
Christopher Cox, Securities and Exchange Commission chairman, told legislators on Tuesday that the agency would issue an emergency rule to stop so-called “naked” short-selling of shares in significant financial entities. The SEC will also consider new rules to extend those trading limits to the rest of the market.
Short sellers aim to profit from share declines – usually by borrowing a stock, selling it and buying it back in the market. But in a “naked” short the shares are sold without being borrowed first. The emergency rule, which would be in effect for up to 30 days, would require anyone making a short sale to borrow the security first. UNQUOTE
In Singapore, our government has imposed such naked short-selling rules long time ago, following some debacles in the local markets.
However, would Futures be affected ?
July 16th, 2008 at 7:27 am
Ana, I’ll delay the Soybeans post and comment on this tonight.