Monday, 9 April 2007

Crude Oil: Sell

My apologies for the delay in posting my latest signals for last Friday's COTs numbers. I was on the road for the past few days, but here I am back at home in Montreal after a three-month vacation in beautiful Spanish Wells, the Bahamas. Hey, what's all this white fluffy stuff on the ground? Brrr! Welcome to Montreal!

The latest COTs release produced two new signals: sell USO and sell XEG.TO (S&P/TSE Canadian Energy iUnits). The USO signal was generated after large speculators in crude oil signalled excessive bullishness, by cranking up their net percentage-of-open-interest position to an extreme long position that historically has been a profitable point to sell holdings. The XEG.TO trade is based on extreme bearishness on the part of another group, the commercial traders. I found this group has historically given the best signals for XEG.

The USO signal was historically most profitable if acted upon the following Monday (i.e. today). Unfortunately, I was traveling all day and only just now put in my order to sell my USO position for tomorrow's open. (USO fell 3.19 percent today. Ouch!)

The XEG trade has worked best on a three-week delay. That means I'm going to sell on the open on Monday, April 30.

It's important to note that the USO trade is a little special. It's the only market in which I couldn't find profitable, market-beating signals for both the buy and sell sides. The trade did achieve a 401-percent profit on the buy side since 1995 (easily beating USO's gain of 227 percent) - but lost 17 percent on the sell side. In other words, the trade has worked best following only the buy signals and ignoring the sell signals. So in the USO trade, I'm not actually going to short crude oil.

As for the XEG trade, both the buy and sell sides gave superior profits with a 360-percent total return, compared to 179 percent for buying-and-holding XEG.

In order to determine position size, as before (see posts below), I rely on the largest historic drawdown for each trade and my decision not to risk more than 2 percent of total assets in any single trade. The biggest drawdown was 26 percent on the USO trade and 8 percent on XEG. However, my data for XEG goes back only to 2001, so that may account for the smaller drawdown in XEG. (The 26-percent USO drawdown occurred in 1997.)

All other signals remain the same as last week... *

Buy: NASDAQ, S&P 500, DJIA, Nikkei

Sell: 10-year Treasury, OIH, S&P 400 Midcap, USERX, XGD.TO

* Please note that my system gave these signals many months ago in most cases. My profit/loss calculations were based solely on taking trades immediately after the signals were given or at most several weeks later - NOT at random moments long after the signals were given. In other words, this list of current signals is only a reference, not a list of trades I would execute right now. Now that I'm back from vacation, I hope to expand this blog to include the specs for each trade. I also want to expand my coverage to many more markets.

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