WTI Crude Daily Chart: Thoughts on trading and a trade set up illustration:
This post was written on January 18-19th but in order to avoid anyone viewing it as a trade recommendation I have withheld publication until today (1-21). It is only meant to illustrate how I think about trades and setups. The placing of entry and stop orders is complex. You need to develop your own plan, consistent with your risk management.
Most price change is noise. As an analyst your job is to identify those junctures where signal content is greater than noise content. Once those points are identified, you need a plan. TA is easy. Trading is way harder, particularly if you haven't systemized your plan.
Importantly, to be successful you need to do your own work. You need to understand how supply and demand shapes a market pattern and then find and isolate trading setups based on that knowledge. You do this by looking at, and more importantly thinking about, thousands of charts. Simple right? The point I'm trying to make is that you shouldn't expect to be successful by mimicking trades offered by some internet jackass like me. You have to do work. Hard work. Put in your time. Become a chart dog. Otherwise it’s a hobby, not a career. Hopefully these commentaries help you find a starting place.
WTI may be setting up one of my favorite technical trading setups, the failed breakout. I thought it might offer a good opportunity to walk through how I think about my trades. After all, what is the point of doing chart analysis if you don't have a plan to trade the analysis.
1. Today (1-19-2022) crude oil (CL) set a modest new high above $85.41 bb pivot that first appeared as resistance in October 2021.
2. Analysts making the fundamental case for $100.00bbl oil seem to be everywhere in the media today.
3. They may be right, sometimes the fundamental guys can be very good. But even in the cases where they get it right, their timing can be off dramatically.
4. In many cases the analyst or portfolio manager also makes the case for an energy overweight or a position in XLE. I would note that since breaking out above its October pivot, XLE has diverged significantly from the price of oil. XLE is up over 10% from its October high and nearly 30% from its December low. I have to ask myself why is XLE so much stronger than oil and how is this divergence most likely to be solved.
5. As a market moves into the zone around a prior high or low, there are really only two possible outcomes. The market either breaks out or it doesn't.
a. While there are only two possible outcomes, there are many variations in how the outcomes evolve.
b. To my mind, professional trading isn't about guessing the future so much as having a trading plan to take advantage of the setups.
The setup: Support and resistance confluences represent junctures where the signaling content is high.
1. CL is testing an important overhead pivot/resistance, in this case the $85.41 bbl high from late October.
2. Price is pressed against the top of the channel/rising triangle that defined the rally from late December.
3. Price is also pressing against the top of the moving average channel.
4. The triple resistance confluence should be difficult for the market to overcome.
5. The Relative Strength Index (momentum) is overbought. Note that this is the same degree of overbought that produced the June and October 2021 highs and has reliably produced important highs in the past.
6. Volume has been somewhat lighter on this move compared to the initial rally to $85.14 (suggesting less demand).
How do I think about set ups and trading?
1. The setup points above suggest that the market is more likely to fail/correct than to break out. In a case like this I am far more interested in finding a way to be short once a confirmed sign of failure materializes.
2. My favorite pattern in this situation is the upthrust or failed breakout.
a. Price moves above the resistance, triggering stop loss orders and attracting breakout traders.
b. After taking stops and attracting new weak handed longs, the market falls back below the prior pivot, forcing weak handed longs to exit.
c. This pattern is always better if it occurs within a few hours of the breakout (which CL has failed to do so far 01-20-2022).
3. If the market fails I like to have a sell order waiting back inside the range. If that sell order is triggered, I immediately place a stop loss order back above the first physical barrier. Trades should only be taken if the upside risk to the protective stop is reasonable.
a. I usually keep it simple. For instance I will often use a trade back below the low of the hour, day or week (depending upon the perspective I'm trading) leading to the failed breakout. Triggers can be set up using bars, volatility, TL breaks and dozens of other tactics.
b. This is the part where doing your homework and finding a tactic that is consistent with your temperament and risk management context becomes important.
4. Conversely if the market does the unexpected and breaks out, I begin looking for a consolidation pattern, for instance a bull flag or pennant pattern above which I can add a buy stop.
I believe that successful trading entails waiting for the high percentage and then having a trading plan to take advantage of it. A platform like TradingView makes it possible to look through hundreds or even thousands of charts to find precisely the trading setups you like the most.
Good Trading:
Stewart Taylor, CMT
Chartered Market Technician
Shared content and posted charts are intended to be used for informational and educational purposes only. The CMT Association does not offer, and this information shall not be understood or construed as, financial advice or investment recommendations. The information provided is not a substitute for advice from an investment professional. The CMT Association does not accept liability for any financial loss or damage our audience may incur.
This post was written on January 18-19th but in order to avoid anyone viewing it as a trade recommendation I have withheld publication until today (1-21). It is only meant to illustrate how I think about trades and setups. The placing of entry and stop orders is complex. You need to develop your own plan, consistent with your risk management.
Most price change is noise. As an analyst your job is to identify those junctures where signal content is greater than noise content. Once those points are identified, you need a plan. TA is easy. Trading is way harder, particularly if you haven't systemized your plan.
Importantly, to be successful you need to do your own work. You need to understand how supply and demand shapes a market pattern and then find and isolate trading setups based on that knowledge. You do this by looking at, and more importantly thinking about, thousands of charts. Simple right? The point I'm trying to make is that you shouldn't expect to be successful by mimicking trades offered by some internet jackass like me. You have to do work. Hard work. Put in your time. Become a chart dog. Otherwise it’s a hobby, not a career. Hopefully these commentaries help you find a starting place.
WTI may be setting up one of my favorite technical trading setups, the failed breakout. I thought it might offer a good opportunity to walk through how I think about my trades. After all, what is the point of doing chart analysis if you don't have a plan to trade the analysis.
1. Today (1-19-2022) crude oil (CL) set a modest new high above $85.41 bb pivot that first appeared as resistance in October 2021.
2. Analysts making the fundamental case for $100.00bbl oil seem to be everywhere in the media today.
3. They may be right, sometimes the fundamental guys can be very good. But even in the cases where they get it right, their timing can be off dramatically.
4. In many cases the analyst or portfolio manager also makes the case for an energy overweight or a position in XLE. I would note that since breaking out above its October pivot, XLE has diverged significantly from the price of oil. XLE is up over 10% from its October high and nearly 30% from its December low. I have to ask myself why is XLE so much stronger than oil and how is this divergence most likely to be solved.
5. As a market moves into the zone around a prior high or low, there are really only two possible outcomes. The market either breaks out or it doesn't.
a. While there are only two possible outcomes, there are many variations in how the outcomes evolve.
b. To my mind, professional trading isn't about guessing the future so much as having a trading plan to take advantage of the setups.
The setup: Support and resistance confluences represent junctures where the signaling content is high.
1. CL is testing an important overhead pivot/resistance, in this case the $85.41 bbl high from late October.
2. Price is pressed against the top of the channel/rising triangle that defined the rally from late December.
3. Price is also pressing against the top of the moving average channel.
4. The triple resistance confluence should be difficult for the market to overcome.
5. The Relative Strength Index (momentum) is overbought. Note that this is the same degree of overbought that produced the June and October 2021 highs and has reliably produced important highs in the past.
6. Volume has been somewhat lighter on this move compared to the initial rally to $85.14 (suggesting less demand).
How do I think about set ups and trading?
1. The setup points above suggest that the market is more likely to fail/correct than to break out. In a case like this I am far more interested in finding a way to be short once a confirmed sign of failure materializes.
2. My favorite pattern in this situation is the upthrust or failed breakout.
a. Price moves above the resistance, triggering stop loss orders and attracting breakout traders.
b. After taking stops and attracting new weak handed longs, the market falls back below the prior pivot, forcing weak handed longs to exit.
c. This pattern is always better if it occurs within a few hours of the breakout (which CL has failed to do so far 01-20-2022).
3. If the market fails I like to have a sell order waiting back inside the range. If that sell order is triggered, I immediately place a stop loss order back above the first physical barrier. Trades should only be taken if the upside risk to the protective stop is reasonable.
a. I usually keep it simple. For instance I will often use a trade back below the low of the hour, day or week (depending upon the perspective I'm trading) leading to the failed breakout. Triggers can be set up using bars, volatility, TL breaks and dozens of other tactics.
b. This is the part where doing your homework and finding a tactic that is consistent with your temperament and risk management context becomes important.
4. Conversely if the market does the unexpected and breaks out, I begin looking for a consolidation pattern, for instance a bull flag or pennant pattern above which I can add a buy stop.
I believe that successful trading entails waiting for the high percentage and then having a trading plan to take advantage of it. A platform like TradingView makes it possible to look through hundreds or even thousands of charts to find precisely the trading setups you like the most.
Good Trading:
Stewart Taylor, CMT
Chartered Market Technician
Shared content and posted charts are intended to be used for informational and educational purposes only. The CMT Association does not offer, and this information shall not be understood or construed as, financial advice or investment recommendations. The information provided is not a substitute for advice from an investment professional. The CMT Association does not accept liability for any financial loss or damage our audience may incur.
CMT Association is a global non-profit credentialing body committed to advancing the discipline of Technical Analysis. Improve investment performance and career opportunities: www.cmtassociation.org
