When trading, it is easy to get caught up in the feeling that you must always have a view. There are stories told and movies made about traders who see something others have missed and stick to their view as they courageously risk everything. There are two main differences between the movies and real life, however. The first is that in real life the majority of people who trade like that go bust, the second that even when you are paid to have a view of a market, there are times when you just don’t know where it is headed. Right now, that is how I feel about crude.
Whether I consider the fundamental factors or look at the chart for inspiration, the conclusion is the same…WTI futures could break either way.
From a fundamental perspective, it is all about demand because the supply picture is now pretty clear. OPEC+ are gradually adding back production and a drop in the rig count last week suggests that the gradual increase in North American supply that came as the world recovered from the initial shock of the pandemic may have peaked. That picture of gradually increasing supply fits with a world where demand is gradually increasing too, but that is far from certain. The rise of the delta variant has shown that there are enough people who can’t or, for whatever reason won’t get vaccinated, that mutations of the Covid-19 virus could remain a problem for years to come.
So, with predictable supply and unpredictable demand, it is hard to…
When trading, it is easy to get caught up in the feeling that you must always have a view. There are stories told and movies made about traders who see something others have missed and stick to their view as they courageously risk everything. There are two main differences between the movies and real life, however. The first is that in real life the majority of people who trade like that go bust, the second that even when you are paid to have a view of a market, there are times when you just don’t know where it is headed. Right now, that is how I feel about crude.
Whether I consider the fundamental factors or look at the chart for inspiration, the conclusion is the same…WTI futures could break either way.
From a fundamental perspective, it is all about demand because the supply picture is now pretty clear. OPEC+ are gradually adding back production and a drop in the rig count last week suggests that the gradual increase in North American supply that came as the world recovered from the initial shock of the pandemic may have peaked. That picture of gradually increasing supply fits with a world where demand is gradually increasing too, but that is far from certain. The rise of the delta variant has shown that there are enough people who can’t or, for whatever reason won’t get vaccinated, that mutations of the Covid-19 virus could remain a problem for years to come.
So, with predictable supply and unpredictable demand, it is hard to form a bullish or bearish view at this point.
If you turn to the chart for inspiration, though, you will be disappointed…
The sustained, very tradeable moves that we saw in WTI futures (CL) in June, July and August are now over, and oil has settled into a fairly tight range of around $67-70. The last couple of days have seen some good intraday volatility, but recently every big down day has been followed by an up day and vice versa. It is clearly a market looking for a direction. That isn’t helped by proximity to the 50-day moving average, marked by the blue line on the chart, which is currently reinforcing the resistance at around the $70 mark.
Add up the fundamental picture and basic chart and price analysis and you have a market that has some potential volatility, but no direction. The thing is, with that kind of setup, you don’t have to have an opinion on direction to profit. You can set up a bracket trade, in anticipation of a move in one direction or another, without committing to either one.
The idea is to place two “stop to open” orders. One above the range and one below it. That way, if CL trades above say, $70.30 you initiate a long position, and if it drops below $66.70, you get short. If one of the stop loss orders is triggered, you immediately do two things. You cancel the other order and set a stop for your new position. That stop will be based on a re-entry into the range, so would be just below $70 on the topside and just above $67 if you get short. Your potential loss is then minimal but if the range break is prompted by a change in conditions there will be a lot of profit potential, whichever way you end up trading.
The point is that you don’t always have to have a view on the direction of crude, or any market for that matter. When that happens, if the market is in a narrowing range I tend to sit on my hands for a while but when volatility within a range is increasing, as it is now, I will often bracket it with this kind of trade. Obviously, it isn’t without risk, no trade is, but if properly monitored and managed the risks of this kind of trade are minimal, while the potential profit is huge.
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