CLU12 - Update for August 10th, 2012

Price analysis for the week of August 10th, 2012:

Market Overview: Crude Oil prices are slowly retracing a good portion of the late spring/ early summer sell-off. One ought to have expected some sort of bounce (where multiple 50% rules were pointing towards the $92 to $93 area). That 'easy money' rally is now behind us and one ought to be a little more conservative (with regard to upside or downside price projections) at least until we are out of the 'dog days' of August. Indeed, we are now quite comfortably into what are known as 'the summer doldrums' where volume thins out as many market participants are on vacation. Within these types of environments price action can be swift and violent yet lack conviction - be careful. 

Weekly highlight: Most notable of late, institutions were back loading up on the long side of the market (this past week's CoT report showed a net swing of 30,000 contracts to the 'buy' side by large institutions). Is the smart money looking for further price appreciation in the short term? Was this past week's 'distributive' price action nothing more than the institutions passing on some of their recent purchases to retail customers? Only time will tell, but as the saying goes - volumes speak volumes...

Trading Strategy (1 month): (same as last week) the rather significant double bottom that was registered on the break of 90.95 shall act as support in the short term. My upside target remains the daily ab=cd bull pattern goal of 95.68. I am concerned this latest move higher has NOT been confirmed by momentum studies. This suggests we do have a bearish momentum divergence building on a daily basis. While not confirmed yet, it does suggest the bull isn't as strong internally as price would suggest. It also implies a push into our target zone (95.68) ought to be considered the end of the run (profit opportunity) and not the beginning of a new bull leg (no new buying until this momentum divergence is resolved). Since this is building on a daily basis it should be interesting to see how this plays out for day trading purposes.
Trading Plan for this coming week: The consolidation I was looking for took almost the entire week to play out with prices pushing to new highs early and failing late. In what technician's refer to as a 'Head & Shoulder's' top, price looks like it wants to probe down into the 91.12 area once again. Additionally, a 50% retracement of the entire move up (90.82) ought to lend support to prices testing the previously mentioned important area (90.95) in the short term. We did trade to 91.71 and put in a 60 minute double bottom through the end of Friday's session by closing above 93.28. This complicates things because it suggests there is a lot of support at the daily, weekly 1 year and weekly 2 year 50% levels and this really isn't an area you should be trying to squeeze nickles and dimes out of. Considering too the bullish tone to the overall market (seasonally an OK time for stocks so PoLR = up) and our yet-to-be-hit daily bull ab=cd target (95.68) and there are plenty of reasons for me to be bullish. Bull / Bear marks to watch outlined on chart above (it is interesting to see I have nothing between $94.74 to $95.68 and $89.63 to $87.58).

Focus for the week: Adding 'OTE' to analysis process has both increased trading opportunities and overall market confidence. Risk/reward models are far better, trade duration models are better and frankly I have been stunned by the amount of money that has been made through 'OTE' signals of late - stunned (and I have been at this game a long time). There have been draw backs to adding to the Analysis process in that my Trade process has suffered and that shall be my focus for the coming week. I have had a couple weeks to get used to OTE's and now have to work on my 'algorithmic' approach to the Trade process. I have a sneaky suspicion that (very much like the HG trade setup) a maximum of $500 risk (or 50 ticks) is just too little a 'risk window' to trade either HG's or OTE's effectively. I will continue to keep data on trade success/failure and how much farther the market went before it did indeed turn.

Analysis process: 

Step 1. Initial Position: Assuming the 60m chart is both trending (as measured by 9/20ema relationship) and has well established targets (typically I use 'harmonic' price patterns like the ab=cd for example) and both volume and momentum are in confirmation. On 15m signal (9/20ema confirmation of trend, price trading at or between 9ema & 20ema with momentum & volume confirmation) move to Trade Process. Ideally I would love to see these signals come in right at 'OTE' entry points.

Trade Process: Upon completion of analysis process begin trade process. 

Step 1. Enter order (on stop) to take a position on 1 (one) contract AOCO -12 [for total risk of $125 on the trade] / +40 [for total reward of $400 on the trade]. AOCO means that once the primary open order is filled there will be an automatic exit order entered on 1 (one contract) at plus 40 ticks ($400). Additionally, there will be a stop loss order entered on 1 (one contracts) at minus 12 ticks ($120). Once the exit order is filled (at plus 40 ticks) the stop/loss order is cancelled. I am scaling back to one contract on the initial trade entry because I have found it is far more efficient to add to the position, once it has become evident the market has indeed found support/resistance and is turning rather than go 'all in' on the initial test of target. Trade process step 1 may take 2-3 attempts. Should stops be hit, it is important to identify 78.6% and 88.6% and repeat. Because of current risk model ($500 maximum risk or 50 ticks per day) my day's activity will end on three consecutive failed attempts. This is highly unlikely but a very realistic probability (10%???) so winning trades must be maintained and maximized....because if this I am reluctant to implement the b/e+.01 strategy at this time. 

Analysis process:

Step 2.

Adding to the trade: (Referring now to the 5 minute, 1 minute and (120)Tick charts). Once a turn has become evident, use momentum, price and volume signals (all time frames must agree) to add to position.

Trade Process:

Step 2. Enter order (on stop) to take a position on 1 (one) contract AOCO (risk should be determined by support &/or resistance and higher or equal with position 1's stop.....no more than maximum risk of 12 ticks or $125)/+.40. Once price, momentum & volume turns are in we should be fully invested in either 'OTE' or 'HG' trade. Long 2 contracts with 2 stop orders working (maximum risk $250) and 2 sell orders working (maximum reward $790). 

Question: At what point do I either let one of the contracts just run (ie. remove AOCO sell at +.40 on one contract) or change the stop orders to 'Trailing stops'. Something I will need to work on through the coming week.

Interestingly, once the orders are placed and filled by Trade Step 2. the work is basically done.....its now just a question of if my analysis is indeed 70-80% correct.

Question you have to ask yourself every morning: 'Are you in the game?' It is OK not answer no; but if you answer yes - then its 110% focus or you are just wasting time....

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/