CLG13 - Update for the week of January 11th through January 18th, 2013

Welcome back to CRI's ongoing Crude Oil Day Trading Blog.
We are within official 'roll' period for day traders - Now in March, 2013 contract (CLH13)
Price analysis you see (first chart & commentary) is CLH13, for the week of Jan. 11th - 18th, 2013.
Each trading day (time permitting) a 15 minute chart is added and trades for that day are analyzed:

Market Overview: In a week that saw little movement in the US Dollar index itself, that can't be said of its major trading partners. While the Yen continues to search for support there are tells out of Europe that maybe the Euro (and its trading partners) are starting to run out of upside steam. Regardless, during times like these (where international currencies are searching for new trading levels) small investors are best to leave the whole thing alone. Trying to out-guess the market, and even going as far as to declare a certain point as 'the bottom' is foolish at best and can be rather financially taxing at worst. Given too our seasonality model (US Presidential election year cycle) suggests weakness after the inauguration and the fact that we have the back half of January ahead of us (re. January Barometer) one shouldn't be too surprised to see a period of 'back-filling' over the coming weeks - caution is currently warranted..

Weekly highlight: Crude Oil continued its steady march higher through the week hitting an intraday high of $96.50 and then backing off into the weekend. Based on recent CoT data (where Institutions have moved out to a 5:1 long over short bias) it seems institutions must have seen a fall in the US Dollar index coming, a bullish fundamental backdrop for CL demand building, and a general resumption of a 'risk on' atmosphere returning to the market. But that now is looking backwards. As of Friday's close we seem to have stalled a bit up top here and I think there are a few justifiable reasons why: 1. The seasonal US Presidential election cycle rally usually stalls after the January inauguration. 2. As well as our regular Triple witching, we have a Leap option series (Jan. 2013) expiry this Friday. 3. The back half of January's price action is often weak as it usually hints at what the second half of the year ought to look like (per the January Barometer). 4. Technically (for February NYMEX Crude Oil), $94.87 was a significant peak from back in October and appears to still remain as a significant resistance point at present. Indeed, a pullback from current levels back into the high 80's may be setting up an Inverted Head & Shoulders pattern. Additionally, the rally has brought us right up to a major downtrend line on the weekly charts. To add a further cautionary note, daily and weekly 50% levels have been exceeded so are no longer supportive of higher price action. 5. With institutions so heavily biased to the long side, is it not realistic to look for some sort of profit taking on their part? And, can we expect them to go to even further extremes? You can only stretch the proverbial rubber band so far.... Put all these 'backdrops' into place and one shouldn’t be surprised to see price consolidate for a bit at this point.
 
Trading Strategy (1 week): BoT (Break out Trades) have been very successful of late. The primary change I have made (which has enhanced performance remarkably) is to NOT buy/sell the actual breakout but to wait for the subsequent test of the 13 period exponential moving average on the fifteen minute chart. I have seen this come in on the next 15 minute bar and I have seen it come in after 20, 15 minute bars. Price often reverses after the counter trend 13ema touch, and the trade resumes its 'breakout direction'. While stops do occur, I have 'tracked' this trading model take on average 5-10 ticks of heat before reversing back in my favor. Considering the volatility of the current market, .40 with-trend swings from the 13ema seem to happen quite often so hence my interest in that level to look to take profits. I will though, get very skittish about holding a position that is either above/below the 13ema Keltner Bands. Put together, I feel comfortable trading this system and that makes me feel good too. 
Conversely, ORT's have been very difficult trades of late and as a result, the profits seen through the beginning of December have not materialized as anticipated. The problem with any statistical model is the amount of inputs. For a model to be deemed statistically relevant one must have a massive amount of inputs to offset short term anomalies. Interestingly, December saw an inordinate number of winning trades. I suppose to bring that statistical model back into historical 'norm' we needed a period of inordinate loses. I believe that is what is happening now. Interestingly many of the traders that work with or are associated with TopStepTrader themselves either were simply not trading or were very reticent about positions this time of year. I hear one gentlemen recently flatly state that he was very reluctant to do any trading until after the first NFPR of the year is released! I too am coming to appreciate how dangerous and 'non-normal' the period around Christmas can be for day traders. Position traders can take advantage of short term 'air pockets'; day traders can too; but you better know exactly what to expect and how to play it. With all that said, I will approach the ORT & 7RT trades with a little more caution going forward. With the idea that BoT's are often a good proxy for  general market direction, I want to start taking the ORT & 7RT trades that agree with the current BoT pattern. And if the RT 'buy' level is far away from 13ema; LEAVE IT ALONE. I fully expect to miss a few of the range trades but I simply can't be so cavalier in the face of conflicting BoT levels...
 
Mental State Review: As per last blog entry, ORT losses have been rather significant of late. So much so, that I am reluctant to participate until I start to see some regularity again. If I am going to take a range trade for the coming week, it must agree with BoT analysis or I won't take it. Sometimes the best offense is a really good defense. While the daily loss limit of the reduced combine ($30k with max daily risk of $500) has been hard to work with, I find my '3 strikes' rule keeps me honest. Daily loss limit must not exceed $465 (3 losing trades at 15 ticks each plus $5 commissions per trade = - $465). This number in itself scares me a little (being so close to the risk threshold) that I have found of late that if I find myself with 2 losers and in and around $300 in losses, I may just call it a day and wait for the next to trade again. 

Trading Plan:
1. BoT (momentum): 
Determine bother upper and lower OTE ss entry points on higher time frame (Daily/4Hour/1Hour charts). Find price breakout (typically double bottom) confirmed by momentum & volume on 15 minute chart at or near these higher time frame OTE ss entry points. Calculate realistic targets (50%-70.5% retrace into VProf 'Claws'/ma's/gaps on higher time frames). Monitor 13ema on 15 minute chart for entry levels once the breakout has occurred. Look to enter with the prevailing trend (BoT) on touches of the 13ema. Regardless of how long it takes, I can only take a BoT position on that condition. All orders should be entered as AOCO (-15/+41). I can only consider moving the actual stop at +30 (or opposing Keltner band touch). Goal for the week is to 'try' 1 trade per day that meets BoT criteria.

2. ORT & 7RT (time frame range trades):
I will prepare as usual for these daily setups. After about a month of 'forcing' myself to take every setup I have come to appreciate the model, its potential, and its risks. As mentioned above, I will continue to follow the model and indeed take positions, but not if they argue with either a significant counter OTE ss level (meaning the market has moved to a dramatic extreme) or if it is in the face of a prevailing BoT.  

That's all for this post,
Brian Beamish FCSI
The Canadian Rational Investor
the_rational_investor@yahoo.com
http://www.therationalinvestor.ca
http://crisdaytrading.blogspot.ca/