Genius… Not So Much!

Back at the end of August I talked about the apparent short that might be setting up in light sweet crude (“Tempted” – published on September 5th), given the lay of the land and the map at the time. Although a short certainly looked tempting, and I know more than a few peeps that played it that way, I suggested waiting:

Like I said, easy to see where some aggressive crude bears might be lickin their chops. Frankly, I was ready to take a bite of that pie myself…mite still…Stepping back a bit, as I am apt to do before entering swing trades I anticipate trying to ride for days to weeks (especially with crude), I am given pause looking at the longer-term chart. There’s no doubt crude is coiling on the monthly map and resolution looks sure to happen sometime in the not too distant future…but not necessarily yet…If it keeps true to its pattern dating to mid-2008, then the fact is we are sitting in the middle of an upside cycle-leg and the momentum is still favoring the long side. If that read is correct, then crude should trade to 102ish to fulfill its pattern. From there we’d have to see what happens—trend adherence would see it perform a mean-reversion move back to support… A break and we’d see a test of the March highs up at $110. Tempting…you bet. For now though, gonna hold tight and let the map fill in a bit…I’d be more eager after a $102 test. Food for thought……

Since that time, the anticipated QE3 announcement out of Jackson Hole did fall through. Yet thereafter the Fed stepped up in somewhat surprising fashion (September 13th) to institute another round of stimulus injection. The market reacted as would be expected, with equities, gold and crude running and the dollar tanking…the result of which was the move in CL last week to test the long term resistance up above the century mark at 102.

That move made perfect sense. I should take a bow and pat myself on the back for having warned peeps to be careful with an aggressive short until we saw resistance tested above 100—I’m a genius! Want more proof of that fact? Look what crude has done since trading up to test that resistance:

Boom…there you have it. I had weighed all available factors capable of influencing price and presciently determined exactly what was going to occur… NOT.

Before you or I puke from such a heaping portion of unadulterated self-serving tripe, let me assure you this ain’t about me being right. I’ve had my head handed to me more times than I care to remember…or for that matter can remember.

correlated and proportional to my belief I know what’s going on and why. More simply stated, the more resolute I am in believing I know what’s gonna happen, the more likely I am to buy into my own BS and succumb to folly.

Thankfully, I figured out a long time ago it ain’t about being a genius…and I’m cool with that. The same should be true for you as well.

No, the truth is I was caught off guard by the Fed move. I did think they’d bow to pressure and keep their powder dry in front of the election. My expectation was that they’d try to “jaw” the market more to bide for time…teasing us with visions of coming helpings of free money till we all collectively exited the polling booths, as it were. In my view, simply reiterating a willingness to do so would suffice, likely sending markets on a more northerly track and CL into the anticipated test above the century mark.

Fact is we got a lot more out of the Fed, which lends to a new quandary—while the upside move to test resistance made sense, logic would have us expecting the dollar-denominated WTI to be challenging up into or above 110 or so at this point. Factor in the mid-East issues and such a scenario seems all the more a given.

But such is not the case. Instead we’ve seen a sharp reversal and sell-off that has the media, talking heads, cab drivers and pretty much everybody else throwing out explanations attempting to explain what’s going on…the fat fingered trade, Saudi comments regarding the abundance of supply (seemingly to offset the mid-East fears), seasonality (demand decline), inventory build, etc… And you can bet when it turns and heads back north you’ll surely hear that the “fear premium” is at play given the mid-East turmoil…yadayadayada!

Enough already! This is yet another example of how not to trade. They are all succumbing to folly by trying to fashion distorted or tortured logic to that which-is or might-soon-be occurring—focusing on the “why, what and if” versus listening to what the map and simple price action are telling them. As much as I hate the cliché, “it is what it is,” that’s the case in trading.

Cutting to the chase, the fact is that much that occurs in the markets, while interesting and entertaining, is nothing more than noise. And how do good traders deal with it? They don’t!
You don’t trade noise or indecipherable signals. You trade when price is following trend (even if that trend is side-winding and/or range-bound) and approaching or reacting to anchor and pivot points—short and long-term stopping points (support and resistance) on the map. Why? Because it is at those times you are trading with measurable probabilities aligned in your favor. At all other times you’re better off not trading.

To be sure, I’m not suggesting you ignore the macro and micro picture…to do so would leave you blindly unaware of broad-market trend…a sure recipe for disaster. What I am suggesting is that you trade just as you approach life in general; you take everything you see or are aware of into account and then you focus on that which matters and discount all else that matters not. It pays to remember that trading is about what price will do and how the collective mass will react to price action—which often has little to do with the underlying asset, market, news or fundamentals.

Bottom line that you’ve heard many a time, if you trade with discipline when the probabilities are in your favor, you stand to profit and survive in this business; failure to do so and you will fail…period.

All that said and given where things stand now, how should you play WTI? Look at the map. I’d be leery of shorting something as volatile as crude when it’s 10 clips into a mean-reversion move back to support after such a sharp reversal. If it breaks the support detailed on the chart, then stacking or initiating positions might make sense. Big “if” though. The trend says it will hold and revert into an upside resistance attempt yet again. Food for thought…

~LH