Monday, April 24, 2006

What You See is not What You Get

I have gone out on a limb and called an Oil Top a few days ago. Today I still stand by this call. In fact, I stand by this call not only because our fund's money follows my mouth but also because we are at a high-odds inflection point in commodities and equities markets.

And when such points occur, being wrong is almost as good as being right. You make money either way.

More specifically, the Oil market rejected a massive short signal on a monthly timeframe and ran up an at accelerating (nearly parabolic) pace into a new high, where the 75 or so area was achieved on a significantly increased volume. Since my call of the top we had two big reversal days confirming the blow-off. The right way to position here was to up-average long puts on most things Oil. Today you should be sitting with a nicely sized position at cost with minimal, if any loss showing for it. BTW, in case you're curious, Victor Niederhoffer, if he were trading these days (he probably is), would be doing this exact thing.

Now, with the Nasdaq recently putting in a new 5 year high (BTW, this is technically as good as an all-time high) and failing to follow through on it twice (failures on 04/07 and 04/21) we have a double top in place.

So, Oil is at a new high (naively bullish) and the Nasdaq has a double top (naively bearish). A perfect contrarian setup. Naturally, my expectation is to see the Nasdaq refute the double top and the Oil to tank. This scenario would generate a very strong commitment to further direction (equities up, Oil down). If case this does not occur and the Oil continues higher then the Nasdaq's double top will likely prove true (sadly) and commitment in the opposite direction will become a necessary choice.

Patience, once again, is a virtue.

Cheers,
/Dmitry

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