Suddenly oil is on everyone's radar, but 40 dollars ago where was the crowd? So many missed the turn in oil after a grueling bear market and excess pessimism. People often ask me about behavioral finance, particularly in capital markets. Oil over the last few years is a great example of how it can come together. Although this piece won't give you an actionable trade, it is designed to show the things I think and watch when looking for opportunities.
The entire setup for me was a multi-month approach, monitoring price, sentiment, and what others were saying. People who focused solely on fundamentals were adamant price could not go up. This really was the foundation of the trade.
Secondly I noticed a technical development taking place. Everyone seemed to be passing around this idea of a 'rounding top'. Now, if you aren't extremely technically inclined, no big deal, you never saw this. But for those who are, you may have (and/or even been pulled in on the short side).
The key is everyone had drawn this rounding top over and over. I discussed chart malpractice in my article '3% Doesn't Matter', which as of now is still the top of the last rate move. Bottom line is I am always on the lookout for dug in fundamental traders coupled with mainstream chart malpractice. We had both with oil (and yields).
What I was telling my members is I've never seen a rounding top during a basing process (more to follow). Naturally some of the biggest trades come from doing the opposite of others. This isn't anything new, and is much easier said than done, but it's great when it comes together.
Below is a chart I put together ('How Markets Work') in September after I had already got long oil which further expands on this idea (especially on looking forward vs backward). Again, from a technical perspective, it's very important to understand that rounding tops (what the above chart hints at) occur after rally's, not declines. This alone set the stage for the market misread.
Everyone will also recall Gartman proclaiming oil would never get back above 40 and that it was a 'worthless commodity'. The bottom line is this is the stuff big trades are made of.
And here's the member video I communicated at 48 bucks, basically the last swing low and a few days prior to my entry. There were numerous signals here including the strength in Brent (was leading). A little outside the scope of today, but when Gartman made his above 'worthless comments', there were some additional indicators screaming extreme pessimism. This plays into determining what the crowd was thinking at the time.
Below was our entry (as updated in private twitter vs a weekend video) and the follow through (as of January '17). I use a variety of communication tools to keep members up to speed with what I am seeing and doing.
One very important thing is I wasn't doing this blind. I use a variety of tools, including pricing models. These models look to get ahead of assets by looking generally at intermarket price data. For instance I pointed out in September my inflation gauges were spiking. I don't control the red line, it simply was spiking. This furthered my confidence in the position.
I also rely on 'pricing models', which are indicators I've created for oil, gold, and interest rates. Most of my models tend to lean on pure price action from related global assets. This ultimately is a method that gives additional insight into other related investors are saying about future price.
The model below is one of two main 'Oil Pricing' models I use internally. At the time of this overall setup it was clear that the model was predicting higher prices, something I commented on both publicly and privately for members. Note the correlation had dropped to near zero which is rare meaning the gap was likely to close.
We continue to be long the market but have taken profits over time. I stress for members that swing/position trades are much more beneficial than jumping around all over. Hopefully the above has given some insight into my overall approach, especially with respect to macro trading.
Thanks for reading
Disclosure: I am/we are long USO TOT STO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: We are long a variety of energy plays through the Fusion Strategy approach.