Crude Data Warns of Volatility But Suggests More Upside

Crude oil might be due for a little more upside, but my new trading setup for black gold is also warning of possible volatility in coming weeks. I've just posted the latest signal information and backtesting results for this new setup on my latest signals table.  The setup beat the market hands-down during the bull and bear markets of 2003-08, with a compound annual return of 29.99 percent (including 0.2-percent trade friction per trade) while being in the market less than half the time - compared to a gain of 3.13 percent for crude. While crude crashed 57 percent in 2008, this setup gained nine percent through being short or in cash. 

Most recently, the setup has been bullish for the past four weeks - its first time being long since Oct. 2007. It will remain bullish one more week, then go to cash for a week and go back to long for two more weeks after that. The parameter details for the setup are all in the notes to the latest signals table. I haven't posted a spreadsheet for the setup, but might do so eventually. You can still create it for yourself using the values I've listed in those notes and plugging them into the S&P 500 spreadsheet I've posted on my DIY page. Please be careful to read all my disclaimer information before attempting to do so and before you take note of any signals or results of this setup. 

As you will see from those results, this setup didn't win 100 percent of the time - none of my setups have - and it has the potential of costing me a decent chunk of change before my stop is hit.

Some other features of this setup:

- It has a wider range for the stop level than my other two setups for the S&P 500 and gold. That means my maximum position size has been adjusted down. It's also adjusted down even more because it was a little less robust on my confidence interval measures. I'm only risking a maximum of one percent of total assets on any single trade based on this signal - as opposed to two percent for the other two setups.

- Also note that one of the two signals that make up the crude setup is based on trading on the same side as the small traders. Normally, these folks are considered to be the dumb money in the markets, who are to be faded. I've found the data suggests that's not always the wisest course of action. The small traders tend to be trend-followers, who jump on trends rather than anticipate them. In the case of my small trader signal, it works by going long with an eight-week delay after the small traders hit an extreme net position in the markets. I can't presume to know why the signal works in such a robust way, but I figure it's because eight weeks is typically enough time for the trader exuberance to have exhausted itself, for a selloff to have taken place and run its course, and for markets to be ready for another upleg. 

- Note also that, like both of my other two setups, this one relies on two groups of traders. I've found pretty consistently that relying only on one group of traders is far inferior in providing reliable returns in backtesting. For example, relying only on the commercial signal of this setup would have resulted in a 43-percent loss in 2008. The small trader signal alone would have led to a 77-percent gain, but between 2003 and 2007 the gain would have just matched the market and the confidence interval for beating the market would have been a decent but unstellar 96 percent since 1995.

NOTE: This coming week's COT update will be delayed because I'll be on the road. I hope to get to it sometime over the course of the weekend. Apologies for the delay. Good luck this week.

TAGS: crude oil, COT, Commitments of Traders, derivatives, Black Swans, market timing, trading system development, CFTC, Commodity Futures Trading Commission, COTs Timer, Monte Carlo, out-of-sample testing,walk-around testing