My personal history with oil

Oil has become my weapon of choice.  I am most proficient at playing it intraday, and also calling longer term pivots, followed by Nasdeq and ES (SP500.)

I have been watching oil for over a year, slowly learning it’s characteristics, how it moves.
The day of the bottom, I said to Janel, “That may be the bottom in oil.”

But I wasn’t playing it at the time.  I had no plan.  I didn’t know on what time frame I would play it.  When I turned out to be right, I kicked myself for not taking a swing position.  But if I had, would I have had the conviction to hold it, without a plan?

And that was only last February, only 5 months ago.  Looking back, it’s amazing to me how long it took me to formulate a plan.  The earliest times I tried some oil positions were way back in mid 2015.  I would get kicked around, and confused, and leave the ring a little bloody, and not eager to return.

After I called that bottom in oil, partly encouraged by Brendan, I slowly started playing oil regularly.  Now I play it every day.  I always have an idea what it will do that day, within that day at various times, and on bigger time frames.

I was able to identify the temporary top,that happened 6-9, to within 50 cents.  That was only 6 weeks ago, and even that seems long ago, and I feel like my six weeks ago self was naive….about the pace of the instrument, and how it makes turns.  It was the day before we left for vacation, so I didn’t make much use of the call.

Oil macro chart

That brings us up to date.  Now, what has oil done lately?

CL 7-23-16

1. It found a bottom, and rallied hard off that.  All the way up it never once pulled back to 50% of the whole up move, over 5 months.  It broke and held well above the 200 day moving average, which it hadn’t done since August of 2015!  Significant bullish signs.

2. It pulled back from an obvious technical location, bouncing exactly off the bottom of autumn 2015 range. It has now moved down a channel, and is only now back to the 200 day moving average.  It STILL has not come to a 50% retracement of the up move, but it wouldn’t be surprising if it finally did this time.

This is still well within the context of a healthy pullback of an upward initiative.  As is so often the case in oil, and probably most instruments, once you get to know them, these significant levels are neatly clustered around another range, where oil got sticky in consolidation.  In this case, the range of December 2015.

The likely behavior here?  Observe how it treated this range when it came up to it from below.  First it bounced off.  Then it went all the way through up, then down, the fell back out for it’s first real pullback.  Finally, it came back to range a third time, went in, auctioned it for 5 or 6 days, moved above it, retested it one more time, then continued up.

Obviously this is an area of interest in this instrument.  It is likely to flirt around with this level all over again now.   Bounce off it, go in to it, through it, back through it, etc.  The 50% level is very likely to hold on the first test.  And that may be a bottom, where oil bases, and continues up.  It could well mess around with this level for weeks, even months.

None of this matters much to the way I play oil, except as context.  My positions are intraday, and last from minutes to hours.  But having a feel for the context has a lot to do with confidence in positions.

Oil dollar relationship

Why did oil originally fall?  Why did it finally rally?  Why is it pulling back now?

The standard story line, of course, has to do with supply and demand.  The Saudis declared in late 2014 that they would not cut production, oil fell, inventories rose, rigs closed, etc.  And so on, until inventories balanced and started to fall.

But look what happened to the dollar at the same time.

DX Run up bull flag 7-23-16

The dollar run up started in July of 2014.  It made a bull flag in October, then exploded upwards in November, EXACTLY when oil fell off a cliff.

What will happen next to oil?  The answer, it seems obvious to me, involves the question, what will happen next to the dollar?

For this reason, I’ve increasingly followed forex, currency pairs, theoretically fundamental reasons why currencies change value in relation to each other, and therefore influence the value of commodities, stocks, bonds, etc.

As a technical trader, of course, I start from what the chart says.  The first thing we can obviously observe is that the dollar is in a downward skewed channel.  It’s currently above the mid of that channel and climbing.  It has touched the top of the channel twice, and the bottom twice.  It is very balanced.

In the short term, the dollar has been rising since 5-4-16 (which, btw, I also called, but didn’t play.)  When did oil start it’s pullback?  About a month after the dollar started to climb.  Oil traders are a little retarded, or devious.

What is likely to happen next, to the dollar?  The 80% rule says it will climb to the top of this range.  From there, two choices, it falls, taking it first to the mid, and then possibly the bottom of the range, which magically corresponds to 50% of the entire up move, or will by then.

Or alternatively, it breaks out to the upside.  The argument that supports the break to the upside is that this downward skewed channel, on a very large time frame, looks like a giant bull flag.  It has broken above 50% of the giant down fall that happened from 2001-2008.

DX giant bull flag 7-23-16

The initiative here is up, and the natural auction would want to test a higher level.  If it did, I would look for resistance just a little higher, at the 61.8 level, which is $102 in the index.  This level also happens to correspond to the range it set up way back in 1997-2000.

Which macro move the dollar makes (falls from top of range, or breaks through to complete the bull flag) is irrelevant to the time frame I trade.  But it’s academically interesting, and practically interesting in terms of context, and interesting in terms of socio-economic implications…and someday I made trade this time frame.

So I have been looking at forex, and clues from central bank behaviors, national political trends, to come up with guesses about how this will likely play out.  But most of that can wait for a separate study of currencies.

In short, my purely technical guess is that the dollar index will in fact test that $102 level, then fall from there (which leads me through a wonderland of central bank speculation, about what would cause this.)  It may fall all the way back through this range one more time, before rising to the $102 level, or it may do it on this pass.  Getting there now makes the turn around from there a stronger bet, since it still hasn’t tested that 50% level of this up move.

If it did break above the $102 level, that would break the entire down ward initiative.  In that case, it would still likely face strong resistance at the $104.50 level, and fall from there.

So there are two situations that can happen on a break above this channel, in my estimation, which have two dramatically different implications.

If it breaks higher, but stops at $102 and falls, it is likely to first retrace this whole range, started in 2014, which is a re auction of the range of 1997-2000.  And THEN, it is likely to fall through the bottom of this range, and all the way back in to the range established from 2004-2014.

I believe this is the more likely scenario technically (and again, will later study how future fundamentals would cause this) for one simple reason.  The prices where the most volume trades is considered the fairest price to do business.

We can visually SEE that more volume has traded in the $71-90 range, than in this higher range, from $90-100.  We can chart that volume too.  It is shown in the volume profile on the right of this chart.  The red line in that profile is the “volume point of control,” the price where the most volume traded.  $78.

DX vol profile 7-23-16

If on the other hand, the dollar breaks above $102, reaches $104.50, hovers, then falls slowly back through this range, it might build out the volume profile at this level, and make the new range of the dollar $90-104 for many years to come.

The difference in these two scenarios has significant global socio-economic and political implications, as well as implications about the price/value of commodities, stocks, bonds, etc.

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