Monday 4 January 2010
One thing a savvy trader must understand is that smart money, [our
descriptive adjective for controlling interests in a market], does not like
company. What does that mean? When a move, up or down, is about
to commence, it goes quickly giving little opportunity to join in, for smart
money is in control.
Why does smart money behave this way?
We are using the daily Crude Oil chart as a recent example. There
was a sharp rally that began in September that was virtually uncorrected
from 67 to 83. The reason is that smart money is going to punish shorts
in a rally, forcing them to pay up as price works higher. Forced out shorts
become buyers that helps fuel the rally. New buyers, those wanting to
establish a long position, do not get any pullbacks to buy at a "safer" price
level. By the time new buyers realize they have missed the proverbial
boat, the weak-handed buyers start to jump in before they miss out entirely
on the move.
Where do these weak-handed buyers decide to join in?
Near the highs, exactly where smart money starts to take profits, maybe
even go short. What happens to the last-in buyers? Crude underwent a
correction from the mid-October highs to the mid-December lows, wearing
out most of the longs. This kind of process repeats itself over and over in
most all markets. In fact, it repeated again from the mid-December lows as
Crude OIl embarked on a current rally from 71 to 81, a $10 move. It was
dicey around the 74 level, but once price cleared the brief congestion,
price did not look back. Every day was a higher low, higher high, and a
There were a few clues prior to the recent mark-up. Note the sharp
volume spike on 9 December, when price broke the "Dubai" lows. That
was followed by three lower low closes, but the downward progress has
slowed, considerably. This clustering of closes and shortening of
directional movement are red flags, warning of a potential change. [See
Crude - Cruising On Cluster Closes]
Price then moves into the congestion area between 71 and 75. This
provided another clue, by virtue of the overlapping wide range bars
moving sideways. This activity tells us there is a tug of war going on
between buyers and sellers. Weak buyers had already been washed
out on the decline, and any remaining longs viewed this rally as an
opportunity to cut losses. Shorts see price has broken under support,
and this rally is an opportunity to sell at higher prices. Get the drift?
How do we know that there is a concerted effort to affect price
movement this way, other than knowing it has been going on for over a
century in US markets? Look at the way price is cutting through all of the
previous activity from October through November. Normally, this kind of
trading range becomes an area of resistance, as buyers try to overcome
sellers for control. Here, there is no resistance, smart money is totally in
control and dictates the movement of price direction.
If you draw a mental line across 78.00 on the chart, from October on, the
preponderance of price activity occurred above 78.00 for about seven
weeks. On the far right, price has cut right through in just five trading
days. When did the move begin in earnest? The day before Christmas,
when many traders were on vacation, [including us], or not willing to take
a position over the holidays.
Here is a classic example of how smart money never sleeps. Holidays?
Not for them. Not when there is an opportunity to catch everyone
unawares. Look at each rally. Where would you decide to get in, and
where would you place a stop that did not entail thousands of dollars at
risk? The irony of all this is that just jumping in is the "safest," and about
the only way to get in.
We had been following and "reading" this market for a few months,
advocating from the long side, without taking a buy and hold, or riding
through the correction, but biding time to get long when it was opportune:
Crude Oil - To Rally Or Not To Rally? Why We Love Pictures!,
Crude Oil - A Message From The Market, and
Crude Oil - Trend Remains Intact are but a few example of how we had
been viewing Crude Oil from the long side, given present tense market
Take note of this kind of behavior for you will see it again and again.
How to participate is the challenge!