Still not the master

Of oil

Metaphors, trader tales, and fish stories

Kung Fu, Ninjas, cowboys, merchant caravans, chaos!

Thank you Sensei, for that whack on the head.

Morad (FT71) says he would go around his prop shop, and ask his traders what they were working on today.  Anyone who could not answer right away, they knew the first thing they had to work on.

So that’s what I’m working on, knowing what I’m working on, each day, each week.

This week, my practice is to stay alert, follow the story throughout the day, not get mentally tired, not lose the thread.

So, let’s review what happened today.  What happened to my plan.  And how that worked in relation to the larger context.

If you don’t think trading is like yoga, like a martial art, you’ve either never really tried trading, or never tried yoga, or a martial art.

It is also puzzle solving.  That is part of the yoga.  Putting the pieces together.  The various time frame players, fundamentals of your product, and interplay with other economic factors and products, news, “exogenous events.”

It is like a martial art in thkung-fu-panda-3-twoe sense that you are literally competing against other players on your time frame.  You know they know your moves, your thoughts, your ideas.  And you should try to know theirs.  Some of them are stronger than you, some are quicker.  (Some are robots:)

The task at hand is, under these circumstances, prevail.  Outwit, outlast, outplay.  And when you don’t, don’t die.  Study.  Learn.  Get stronger, quicker, smarter.

You can’t always tell who’s who.  Sometimes locals, like you, pose as out of towners.  A pipsqueak poses as a big merchant on a longer journal.  A big bully pretends to be hurt by a small move, to lure you in.

And sometimes, they find a hidden idol, while you are distracted by the game.  Or the game master awards them a clue, for diligently listening to their news feed.  The dollar has started to move on some comment by Dhragi.  The Saudis are posturing in front of a mirror.

On the other hand, once you are well positioned, you are sitting pretty on the caboosh of an actual larger merchant on a longer journey, you are up a buck and well fed, even though you are a local, you can thumb your nose at your compatriots, beating each other up, while your entourage weaves and ambles through town.

Maybe the buyer a few days ago, at $39.19, was neither a local like you (definitely not), nor a bigger local, a titan, a master trader, with a $500m hedge fund, but the actual merchant, Exxon itself, using futures for their actual purpose.

Maybe the buyer actually wants to take delivery of 2.5 million barrels of oil, at an average of $39.75 ish.

If you are on his entourage, he doesn’t give a flying fuck.  You are a flea.  He’s fucking XOM!  X ON Fucking Mobile!  Grand poohbah. A whale among men.  Cower before his majesty!

If oil futures fall from $43.20 to $41.85, and you get thrown to the mud from his caravan….for him it’s just a wobble along the way.  Get up and wipe yourself off, get back on, or go off sulking.  XOM doesn’t give a damn.

And it’s on you to be prepared for that fall.  If it seriously injures you, it’s due to your own preparation.  No one’s gonna cry for you, except maybe your mom.  And maybe not even her, since she may not understand what the sam hill you’re doing in the first place.

“I fell off the wagon and sprained my acct ma.”

“Oh, no, your what?  Is it serious?”

“It really, really hurts!”

“But, will it heal?”

“I dunno.  I guess it might.”

“Well, get well soon, honey bunch.”

You try to take this all in, absorb it, and play it.  And so do others of similar size and skill level, and so do hedge fund titans.

So, here’s how it went down

8-8-16 narrative off the bottom

On news last Wednesday, a huge buyer stepped in, bought 24,000 contracts in a minute, crushing all who would defy him!

Maybe it was a hedge fund titan, maybe it was Exxon.  Who knows?  Your guess is as good as mine.  Well, depending who you are, hopefully my guess is better.  Ok, what’s your guess, anyway?

We got the impulsive move up, that completed through the Asian and European sessions.  Everyone believed in this guy!

The next day we got the expected completion, on action I detailed in “In the Zone 2.”

At this point, technically, the move was done.  Impulse, pullback, completion.”  Does this stuff matter to Exxon or the titan?  Not Exxon, maybe the titan.  Maybe neither one.  They may have a larger view in mind, and be on a yacht off the Hamptons, not even watching.

On Friday, just before open, price poked out of the previous day range, and fell back in, hard.  But by an hour back in, buyers stepped in, fought with sellers, taking price back and forth through mids, and setting up a megaphone type reversal pattern.

The quick witted of us may have noticed that the 7:30 am washout technically completed the correction, and bears were ultimately engulfed in the megaphone.

Price wandered anemically up through the weekend, if 80 cents in oil is anemic by your standards.  Still, it was a putter, not real initiative, and began to form megaphones in the other direction.

I zoomed out, looking for clues for a reversal down.  First step, review history.  Back on 7-26 and 7-27, there were tops of two days, where price rejected quickly down, from $43.25.

8-8-16 historical resistance

On one hand, that is a poor high, and technically “needed” to be repaired.  Price needed to pierce that level.  At the same time, I expected the level to hold, and set up the reversal, since I thought the up move was over extended, and needed an excuse to correct.  I was just looking for the excuse.

The thing is, everyone who thinks like me (which is not Exxon, or the titan) also saw what I saw.  Some of them might have schemed and ganged up.

If price got through that level, there was really no resistance above, until the gap, from $43.60-$43.77.

I thought the first level would hold.  Here’s why, and how, and how it went.

8-8-16 5 min

The morning was one solid up move.  I tried to start shorting early, at over-night high.  Took 3 shots got no ducks.  FT’s rule is, try something thrice and fail, give up for now.

Later, I started to try again, at that first top.  This is what I saw.

8-8-16 first failure

That first failure back through the liquidity (white hot line at $43.10) was tricky to catch.  It fell 36 cents, just over 1 standard wave length.  I tried to short the mid of the down move.  Got stopped out, acct bled a bit more.

(But don’t cry for me Argentina, all my mistakes of the day were paid for by an early 30 year bond short.)

Even though my short would have worked, and the downside yielded a few more pennies.  But the fact that the mid of the down move was taken back invalidated it as an impulse.  The subsequent down moves were only 26.  Noise, not impulsive.

So the day started to become a bull flag.  And I expected a completion higher.  This would set up a perfect short, from my anticipated $43.20 level.

The way I would expect this to happen is, 1. Collide with that level, and fall immediately, or 2. Burst through the level, then fall quickly back through.  The picture above shows both situations.  Price burst through $43.10 and fell quickly back through.  It collided with $43.16, and immediately reversed.

I expected $43.20 to act like one of those two scenarios.

If price broke above $43.20 and held, the idea seemed wrong to me.  Problem is, all these thoughts are natural to locals, easy to read.

You can see in the 5 minute chart what actually happened.  I put an oval around where price held above $43.20.  It appeared to bull flag right under $43.40.

I was aware of the $43.40 level, even though it was hanging in space, according to history.  The only reason it was a reference was as a measured move, a mirror of the morning move.  And even then, I was looking at it, because I did bad arithmetic.

Low of day was $42.36, and the bottom of the bull flag range was $42.81.  So 45 cents.  The top of the range was $43.16.  $43.16 + 45 cents = $43.60…not $43.40.  Duh.

And, the morning impulse was $42.36-$43.16, 80 cents.  Price based at $42.81.  So an exact mirror of that move was $42.81 + 80 cents = $43.60, the exact bottom of the gap.  Which seems like a reasonable target.

So, there was really nothing at $43.39, that I could see then, or now.  Plus, the bull flag did not complete until 40 minutes to close.  That did not seem like enough time to mount a reversal.  I don’t think it usually works that way, but I’ll have to go back and check my stats.

Still, if it had blown 20 cents past $43.20, then fell right back in, in a few minutes, it would have been an obvious short.  But that is also not what happened.

What did happen, which you can see in the 5 minute chart above, and I’ll show again on Bookmap below, is that price broke through the critical level, late in the day, held above the old ranges, paused, built volume up there for 15 minutes, then started to drift down.

At that point, it starts to look like a break out trade.  Like now $43.20 will hold on a retest, and price will continue to the next logical level, which is $43.60.  10 minutes until close, that seemed likely.

Nope, 3 minutes until close, and sellers took it back in to those old ranges.  Unusual.  I think this is statistically anomalous, but I’ll have to study to see for sure.

8-8-16 final failure

So, that’s my story, and I’m sticking to it.  My sparring partners won fair and square.  They fooled me.

I lost throughout the day, although I did finally get a few points back shorting with that group right at the close, who held it below $43.20.  Price drifted down.  I covered my short at day’s mid.  But at least I didn’t go long there.

Price continued lower.  And now it looks like a short, on a pop.

My idea was right all along, but I got hoodwinked.

The goal is to develop the second sight, take a position, sit sanguine on the side, like a wise grasshopper.  Watching the drunken cowboys break beer bottles on each others’ heads, having seen it all before, in the Circle of Iron, knowing my part was written for Bruce Lee, and allowing his spirit to do its thing.

And, course, even in Kung Fu, Caine ended up in all sorts of predicaments.  Stuck in a hot box.  Hogtied by the river.  Always down, but never out.  And, even Bruce Lee died.  Or did he?

And the moral of the story is?

It’s not just if you’re right or wrong.  It’s how you play the game.  I mean, it definitely IS if you’re right or wrong, over a large body of trades.

But I could have lost a lot less along the way today, if I hadn’t lost my head, and kept trying the same idea through the early time, when it wasn’t working.

And if I’d stayed calmer, and kept a few more bullet (to mix metaphors), maybe I could have had the courage to stick to my guns on the bigger picture short from the top.

After all, even if price did hold above $43.20, the idea that it needs a correction is still valid.  And the next resistance above, $43.60-77, was not that far away.


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