Tuesday, 24 July 2007

Energy Blow-Off: A Fat Tail?

A reader just wrote in asking about my bearish signals for energy based on the Commitments of Traders reports. I wanted to address this in a blog post because I think it's an interesting question in light of the recent ramp-up in crude oil and energy stocks.

The reason for the signal is that large specs in crude oil have registered historically extreme bullish positions for weeks that in the past have been good times to be in cash this market. Similarly, the commercial traders in crude are also at historically extreme bearish positions that in the past have led to profitable short signals for oil-related stocks.

My system did make a correct call, however, for natural gas, which has been getting chopped to pieces for two months. My best COTs setup for this sector is to trade on the same side as the large specs, and they've been right in their current call, which is to stay in cash this market.

Of course, no setup is always right. Just check the "Trading Setups" link to see details on the wins/losses for each of my COTs-based setups. What could be happening in this market is we're in the "fat end of a tail" - a historic blow-off that is extending longer than previous such periods in the data.

Such periods often end in tears! But I can't count on that. I've just gotten to the point where my position in DUG UltraShort Oil & Gas ProShares has dropped to the largest past intraday drawdowns for my OIH and XEG setups. (See explanation at the "How It Works" link above.) So a couple of days ago, I set a stop at $41.41. (That's based on the June 20 low minus the largest Average True Range value on the 15-minute chart.)

Who knows? Maybe that was the low, and it's all tears for the energy bulls from here on - instead of me!


Anonymous said...

I would definitely get back into DUG


Alex Roslin said...

Hi Daniel,

At this point, the price has rebounded nicely and I haven't sold. Will do so at the stop price I mentioned. One of the keys about trading mechanically is not to second-guess your signals.

On a related note, I think it's quite interesting that my trading emotion level has pretty much vanished since I switched from trading on technicals to using my COTs-based system. Of course I'm happy when a trade is in the money, but I have enough confidence in the system not to care much when it's down. It's become more of an intellectual exercize, for better or worse.


Anonymous said...

Hi Alex:

Can you share (or direct me to) the list (or Excel sheet) of ETF's you trade for each market in your list? (ie. DUG for shorting oil, SLV for going long Silver, etc).



Alex Roslin said...

Hi Brian,

Thanks for your question. At some point, I may draw up a list, but the problem is there are so many new ETFs coming out now I'm afraid it might be a lot of extra work to keep it current.

What I'd suggest for now is checking Don Vialoux's excellent technical analysis website for a regularly updated list of ETFs by various categories: http://dvtechtalk.com/specialreports/specialreport1.htm