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Hypo Z, crushed!

Engulfed!
Futures Porn
Epic waves, whales and squeezes
Surfers drowning or ripping up the face

More oily allegories

(Hypos pasted at the bottom of the blog)

Crushed, on my second day on the job!  (Of formally writing and playing my hypos.)

While it’s WAY more fun to win than to lose, I have to admit, it’s kinda fun to write about losing.

I guess French audiences like to end on a losing note, while Americans feel the opposite.  In any case, conflict and challenges are widely known to make stories interesting.  And in reality, “nothing ever ends,” to quote Jon, from Alan Moore’s Watchmen.

Metaphor du jour: oil at 9 am pst, oil is “like a giant erection, wanting to penetrate that gap.”

oil erection

Fun to watch.  Glad the entrance fee only cost me minimal money.  No play here for me, in a situation like this.

This is “sellers SHUT OFF!”  It’s a larger version of the phenomena where news comes out, causes a wave, then a bigger wave engulfs the first wave.  There is no choice but to surf the second wave.  But you might need some market metaphor jetski to get on.

At least learn a new trick, old dog.  Catch the frisee!  No, bad metaphor.  Spin around!  I don’t know what it is.  It’s a hard trick for a dog, young or old, to learn.

I did it yesterday, on news.  But on this larger time frame, it’s more rare.  So, less practice opportunities.

Cause and effect

What caused this?  Did something profound fundamentally change since yesterday?  The IEA said this morning that oil supply and demand is naturally balancing.  Really, is that this arousing?

http://www.wsj.com/articles/oil-prices-fall-as-iea-cuts-demand-forecast-1470907571

As if.  As if supply and demand are really the fundamental story in oil prices.  That is the wool pulled over the public’s sheep eyes.  I think charts tell us the real story is about the strength of the dollar.

The very large down move in oil was clearly tied to the very large up move in the dollar

dollar oil comp

And even on a more detailed section, zooming in on just 2016 alone, the price action is correlated.

dollar oil comp 2016

It gets sloppier when the volatility is lower in both products (although these are still big waves for traders.)

In dollar neutral territory, maybe supply and demand really do cause the waves of smaller fractals.  Or not.

Why did oil fall on 9 out of 10 bullish reports of inventories shrinking, from June 2016-August 2016?  Because the market is pricing in the future when that situation reverses?  Really?  Maybe.  That is giving the prescience of oil traders a lot of credit.

Dollar correlation with oil

Oil bottomed in Feb 2016, while the dollar was cresting.

Then the dollar started to tumble, and fell from Feb to hit its 2016 low in June.  During this time oil climbed off its bottom, and peaked 1 month after the dollar bottomed.

The dollar started to climb through the summer of 2015, while oil slid.

Coinkydink?

The point is, if you think you know what the dollar is going to do next, that’s tradable information, in oil, and other commodities.

Another way to look at the correlation of dollar strength with oil is to chart them as a pair, the way currencies are charted.

Pairs chart

dx cl 2 year

The simple reading is, the peaks in this chart, are the peaks in the dollar value, and bottoms in oil.

Zen mind, beginners mind

It’s interesting that today I thought, “I haven’t lived through a day like this before.”

And yet, I’ve been watching oil closely for months, in some way for over a year….increasingly trading it, surfing the waves.

Surely days like this have happened before.  But I wasn’t following as closely I guess.  I wasn’t trying to predict it, surf, follow the story, look for the weather or whales that created the swells.

Fractals

In oil (which is probably analogous to other commodities, at least, and in some other ways to bonds and equities, and anything with a monetary “value”) the fractal hierarchy goes like this, imo:

Largest fractals are fundamentals based:

Biggest waves are caused by dollar value (which itself is sloshing around in a forex sea which bares monitoring)

Within those largest waves, the next fractal smaller has to do with supply and demand, econ 101 stuff, which the media often cites as the primary driver.

Smaller reflections: within those fundamental waves is a technical paradise. 

Swing waves, where value is measured against where it was on previous days, weeks, months and years, and the waves react to the rocks and winds of previous consolidations…these waves can give the econ 101 waves a run for their money, and imo sometimes “engulf” them.

Intraday waves, these are the smallest fractals, with the very smallest size that can be called a wave being 30 cents, and then larger intraday waves created on the fly, sloshing between the histories of previous days, or cresting in to new territory based on “measured moves,” until they crash on the inevitable shore of exhaustion, overbought or oversold, and slowly slink back in to the sea.

Engulfment

The action, the phenomena today, is known as a “bullish engulfing.”  This is when yesterday was an impulsive move down, and today totally engulfed that day, and ended above it.

This is the same phenomena discussed earlier, about news days, when we get very fast and growing waves.  And either the first wave follows through and keeps growing, forming a trend in that direction, or, like yesterday, the first wave is engulfed in an even bigger wave in the opposite direction, which then usually creates more waves trending in the direction of the engulfing wave.

Today was that same phenomena, but a bigger fractal of it.  And not only did today’s wave engulf yesterday’s down move, it engulfed 4 days of waves, making it exponentially stronger.  The waves are getting bigger!

4 days engulfed

The end of the movie

How to surf a non-news day trend.

By the time the wave engulfed the previous one, I thought, I’m pretty sure I know how this movie ends.

But I should have known when my mid short did not work.  That was the same exact thing as the smaller version, yesterday on news, when half of the first wave taken back, I reversed, and went with the new wave.  Bad Trader!  Slow trader!  Wake up!

I got stopped out on my short, but I should have reversed.  The mid of the down move from yesterday was $42.25.  When it got there, just over 1 hour in to trading, I thought, that is an ugly high (meaning, it looked like it wanted to go higher.)  Sure enough.  Take note.  File for future reference.

As the day wore on, and price did crest over yesterday’s high, over the last 3 days, fill the gap, and hold up here, I began looking through history for clues about how the day would close, and what future days might hold in store.

Historical comparisons

As the relentless trend proceeded, I zoomed out to look for historical comparisons.  What are the biggest green day wave sizes on candles, including their premarket bases?

I’m especially looking for days that didn’t start a move, but moved off the second tier up….but included one base candle because it was so big.

historical comp wave size

2-17-16: $2.78.

4-8-16: $2.36

4-20-16: $2.98 (the record, and amazing because it followed two other big up days….but it did leave a tail, so trading those days was a wild, volatile ride.  This was a Wednesday, inventory report.)

6-17-16: $2.44

Today: $2.75

Almost a record!

Quiz: Where did the biggest green candles close?  Did any of them have big topping tails?
Answers: At the top, and no.

3 shorts

I tried 3 shorts.  That’s the rule.  3 bullets.  If you fail 3 times trying to “catch a knife,” or in this case, “pop a balloon,” or whatever we decided the opposite of “catch a falling knife” is.  Surely there is something better.  There must be an official metaphor.

Surely we can do better.  Whack a mole?  Jump on a rollercoaster at the top?  A work in progress I guess.

The first short made perfect sense.  It was hypo 1.  The mid trade.  Simply going with the bigger down wave.

My next try was at 43, the round #.  Less excuse for myself here.  It was where yesterday sold off, approximately.  Often the same sellers do step in at the same place.  But by this point, I was only trying to trade a correction, a pullback to mid.  Didn’t happen.

I saved my last bullet for the blow off.  The target for that was the top of the gap fill.  The target that I was waiting for all week, Monday, no, Tuesday, no, Wednesday, NO!  Today, yes!

3 shorts

Porn metaphor

Finishing off the porn metaphor here, sure enough, the gap did fill, and that was the blow off.  I started shorting, and the last short worked.  But by then, it was only a scalp, to recoup losses.

And, here’s the “money shot”

oil money shot

And a close up of the “blow off,” eeww.

climax and blow off

Drivers

Who are the drivers in a move like this?

There has to be someone big, with conviction, to initiate the move.  An innovator, or innovators.  As discussed on previous days, this could be actual companies, like Exxon, one big guy with a hedge fund or just a big acct, or a collusion of big guys.

They have to push through local traders, like me, trying to resist logical levels.  But once they do, the move takes on its own momentum, fueled by shorts stopping out (buying).  And then astute, alert locals (unlike me) might reverse, sensing an up wave forming, adding to the buying.

Although, to be fair, this is a difficult choice to make.  Because for every day that acts like this, there are more that don’t.  A more natural progression would be, once it broke the key levels to the upside, and appeared to be forming an uptrend, there would likely be a pullback.  At least a flagging pause.  A relentless up trend like this seems rare to me, particularly on no news, and plowing through 3 days of previous inventory.

The future of oil futures

And how to play

What to expect next?

Simply put, up to $45-46 at least.

$45-46 target

Look for logical pullbacks to get long.  Now that it has broken above the 4 day range, and held, it could fall back before advancing, or not.

$42.50 would be a good long, if it got there.  Both a 50% pullback of today, with visual chart support as back up.

$42.50 long

There are various ways a long could work from here.  Clues will come partly from the overnight action, and where it opens tomorrow.

Scenarios for tomorrow

  1. If tomorrow opens near today’s close, tries briefly to get back in today’s range, and quickly moves up, and holds above this range, it’s unlikely to get back to that 50% level. But it may dip in to yesterday’s range, after the first hour, before continuation up.  Or it may just go up.
  2. If price opens right around today’s close, tries briefly to get out, rapidly comes back in, and holds, it’s likely to explore deeper. A short might work then, followed by a long from that 50% level.
  3. If it gaps up, and opens well above today’s high, a “gap and go” scenario is most likely. Another up-trend day.
  4. If it sags back in to today’s range overnight, that 50% pullback may set up for a long entry.
  5. If it breaks down through 50% of today’s move, we are back in hypo z land.

Especially now, since this one day engulfed 4 days before it at once.  The uptrend is pretty likely to complete. In fact, today constitutes a brand new initiative wave. It’s bigger than the first wave off the bottom.

Crude hypos 8-11-16

Here is how the chart looked this morning

8-11-16 hypos

The oval on the 50% line was my plan for where to get short.  As seen, the day started like I thought. (I shoulda been long, right?  Shoulda woulda coulda)

Overview

Overnight changed context when it went below $41.33 (50% of the up move since last Wednesday) in Euro session.  Makes follow through down more likely.

Overnight is megaphone, makes correction up more likely on open.

Overnight inventory is 100% net short, adds weight to the up first idea (short squeeze.)

Hypo 1

Open near yd close, up to $42.33, down to $41.33, and beyond

Hypo 2

Open year yd close, try in to yd range, fail, down to $41.33 and beyond

Hypo 3

Down from open, take out $41.33, and move up

Hypo 4

down from open through oo close, then start to work back up

I guess hypo 5 is that it doesn’t get as high as $41.33 and then moves down

into yd range a little, but not that far

Hypo Z
a sustained up move, taking back all yd range is pretty far down the list, like hypo 6 or 7 or z

Failed trade

Here is a detailed look at the action where my short idea did not work out.

mid short failure

The purple lines where my short entry.  The blue line was my first scale.  I dragged it up, trailing 25 cents below, as price moved up.

When it did not fail from my entry for 5 minutes, that’s when I said to myself, “ugly high.”

The next move, bursting through liquidity in the $42.28-30 level was not good.  It “should” have founced off that for the short idea.  Failed immediately, not pushed through.

There was one last hope the short would work, when price sagged through that area.  When it still didn’t fail at 15 minutes, that left a 15 minute candle body closed above the line in the sand.  Bad news for candle watchers.

By this time, calling it quits early would have probably been best.  I’m not sure if it was reasonable to reverse and go long.

By the time it did that burst up through $42.42 the short was obviously dead.  I took a 20 cent loss.  I might have broken even, if I’d read that break up, and then the sag back to my level.  But on the second move up through $42.30 it should have been clear to me.  I should not have lost more than 10 cents.

The key is, there should be quick rejection of the area.  If it does burst through, it should fall back through quick, not make another push higher, before fading back through.

All this said, sometimes mid shorts do need a wide-ish stop, since it’s a higher time frame play.  We can look what happened at the overnight now.  However, the difference there was that, that was a mid of a week-long move, whereas I was trying to short the mid of yesterday, a 1 day move.  The shorter the time frame, the less the mid should breach.

Here was the mid breach that spawned this monster up move

mid breach on up move

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