Time To Break A Rule?

I’m a trend guy.  I believe in the strength of trends… inertia and all that.  As such, I encourage those who follow me to trade with the trend… always.  So much so, that it’s a rule in virtually all of my trade setups.

And yet…

There are times when a countertrend trade (obviously a trade that goes against the prevailing trend) just makes sense.  Maybe it’s when the value proposition is just undeniable (even to a price guy).  Maybe its simply a regression to the long term mean play.  Maybe its a heads up provided by anecdotal evidence.  Whatever the reason(s) countertrend trades can make sense if taken appropriately (like all other trades actually).

It seems to me that oil is approaching just such a level… if it’s not already there.

USO W 16 Jan 2015 Close

Things in favor of a bounce?

  • Fundamentals — At some point the largest suppliers will be compelled to cut supply if oil continues to fall.  Saudia Arabia has indicated that it will not cut supply until some American shale producers are forced off line.  News and chatter suggest we are getting close to that point
  • Technicals — Both the linear regression line and the exponential moving average shown in red on the oil ETF above are sufficiently far away from price (stretched) to encourage a potential snapback.
  • Anecdotally, major oil traders are reportedly booking supertankers for stockpiling crude at sea.  Obviously, this suggests what they think about the current price level of crude here in the 40s.  It also aids by pulling some supply from the market.

Am I making a call in oil here?  Not really.

I do think a good trade is coming and that the astute trader will be able to make money from it.

How to implement the idea?

One way is to buy a break of last week’s high at 18.62 with a hard stop below last week’s low at $17.10.  Obviously, exercise proper risk management through position sizing and adherence to your stops.  Interesting target areas are noted by the green arrows on the chart above as well.

I would be willing to take this trade several times to try to capture what I assume, given the cyclical nature of oil, will be an eventual updraft.

Good trading.

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