Crude Oil Technical Head Fake

  • Posted on: July 29, 2010

On the Fourth trading day after what looks to be a definitive bullish break out, we have the head fake. The market breaks sharply, settling below the upper trend line of the symmetrical triangle formation.

This is precisely the type of price action that goes along with technical analysis. Just as traders might have finally joined the bullish camp, looking for solid follow through to the upside, the market corrects. I would argue that after watching these markets for 22 years, moves such as this are common.

Which is exactly what gives anti-technical “experts” their ammo. The formations are not full proof. And is a world of black and white absolutes, such an outcome is enough for skeptics to argue, that since its not 100 percent a full proof “science” then it should be totally discounted.
Markets do not follow any tried and true methodologies. The scientific method can not be applied to technical analysis. In other words, formations do not consistently, and repeatedly, verifiable re-produce the same outcomes. Period. Those that throw technical analysis fail to recognize the longer term value of having chart formations from which to make educated predictions about what might or possibly could occur, once a formation has been noted.
Breakouts, followed by head-faking snap backs are common place in trading. It is better to embrace this fact, I believe, rather than to totally discount technical moves simply because they are not re-produce able, measure able and repeatable.

Instead, I would argue that the market did what it usually does, punishes trading opinions any chance it can get. The market’s mechanism, in practice and reality, seems to be function of punishing various opinions any chance it gets to deliver those punishments. Bulls or bears, if you make a move based on a technical breakout, be prepared for your intestinal fortitude and risk management strategies to be repeatedly tested.
Longer term, the market will ebb and flow with the invisible hand of supply and demand. Shorter term, as in the case of this 4-day breakout and then failure, are simply a fact of life.
I would note, however, the powerful tendency of the trend line to repeatedly attract trade activity.

I would not be surprised to see another volatile move back up through the upper trend line, rewarding the patient bull, while whip sawing as many indecisive or un committed bulls.

A trader could have his or her mettle repeatedly tested if the market traded close to this upper trend line. Typically, the market will shake out as many traders as it can, before finally moving decisively. That is why a series of 4 or 5 consecutive trading days can produce multiple tests of such a trend line.
My own personal preference would be to initiate sells each time this trend line is tested over the next 10 trading days. Of course, each initiation would have a pre-determined loss above the market protecting against a severe loss if and when the market makes a decisive move back up into higher territory.
For now, however, I’d be bearish crude, against this upper trend line. I would rather initiate sell positions, along with buy stops above the market, in an effort to be properly positioned for a potential larger move downward to the lower support trend line below the current level with a downside target to cover around the intersection of the lower trend line. Such a move suggests a downside target of 93 to 93.50.

Good Trading