Wednesday, October 11, 2006

Oil Bear

It's uncommon for me to get bearish after long and quite vicious declines. Goes against my adopted contrarian's grain. But, as a contrarian I look for nuances and while I saw these nuances in earlier price action in Oil (circa Sep 20) - that prompted a series of excellent trades on the long side - they have since disspiated and made the current decline unattractive.

Not that I'd go short right here but I am now bearish enough to sell a rally with an outlook for a few more dollars on the downside. That's what the commodity itself looks like to me today.

Now, let's throw in some equities into the mix and we see our favorites (VLO, TSO, NE, etc.) break down, rally and consolidate below their recent support levels. In addition, OIH managed to frustrate an army of both long and short players within the last six weeks and still stayed in a tough consolidation below its support.

In general, as dictated by our directional model, when support breaks and the price stops falling, it is a cause for alarm. Pretty contrarian, eh? The basic reason lies in the fact that if support break were fake, an immediate rally would ensue that should carry the price back above the broken level. When this does not happen, two things can follow: either the price continues to fall (naive but often true) or it stops falling and moves sideways.

When the latter occurs, the odds for a continuing move lower are quite high. Naturally, random events will alter any particular scenario but the overall odds over a large enough sample certainly favor negative price action.

Following this digression into trivialities of chart reading I no longer have a reason to be an Oil bull. And I have several to turn myself into a bear.

So, I change my mind. I change my mind because as a trader this is what I do.


P.S. Does this mean I should be a bull on non-oil equities? Good question!


At 2:29 PM, Anonymous Anonymous said...

Come on Dmitry, this is not the time to hide under the Amaranth blanket -- if your city slicker buddies in Manhattan are going shorts, a true contrarian would buy with both hands

At 5:10 PM, Anonymous Anonymous said...




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