We, as human beings, love to look for order. We have a problem accepting that not everything falls into neat patterns, so we go back, look at what happened in the past, and retroactively apply patterns to it. An awareness of that tendency is why I am naturally skeptical of much of the overcomplicated technical analysis that is popular amongst retail traders. Put simply, just because A led to B and C in the past doesn’t, in any logical way, mean it will in the future.
That said, though, at times patterns can be observed that seem to happen for a perfectly logical reason and, at least until everybody is aware of them, they can provide a trading opportunity. Such a pattern has emerged in the recent chaos of the oil futures market, and looks like providing an opportunity for the next couple of weeks at least.
The pattern has come as a result of the fact that there are two inventory numbers released for U.S. crude each week; on Tuesdays at 4:30 pm the private American Petroleum Institute (API) releases their estimate of stockpiles, and the following day at 10:30 AM the official government numbers are released by the Energy Information Agency (EIA) which is marked by the red vertical lines on the chart below. The discrepancy between these numbers has created a pattern that is worth trading.
(Click to enlarge)
What has happened in each of the last four weeks is that the API has released a terrible number, suggesting massive stockpiles of crude…