Yesterday I posted on stocktwits that market participants should keep it simple when trying to figure out which direction crude oil is headed next. The trend is clearly down and has been for months now. As expected, my comment was met with quite a bit of snark that sounded something like “Yes, great advice…keep it simple, pffft” That’s fine, everyone is entitled to their opinions, but that comment and others brought up an important point related to markets; people are always looking for complexity when simplicity will do just fine.
This search for complexity is exactly what we’re seeing in the oil market as it seem’s everyone and their mother is just dying to call the bottom in crude. At this point I’ve heard arguments about supply, demand, rig counts, bottoming tails, positive momentum divergences, mean reversion, energy stocks diverging, price stabilization, etc… The thing is, many of these arguments bring up valid points (as for rig counts, nevermind I’m not even gonna go there…), but none of it matters until the price of oil actually stops going down everyday.
It doesn’t take a rocket scientist to look at a chart of crude oil and say that the trend is lower.
In fact, anyone can draw these simple conclusions by pulling up a chart on Yahoo Finance.
1. Prices are down roughly 56% off their June highs, closing down 8.3% this week alone.
2. Prices are making lower highs, lower lows & the 200 day simple moving average is downwards sloping – the trend is down -.
3. Prices have not been able to sustain any intraday gains and in most recent rally attempts could not even hold above the previous week’s low.
Now these simple points may not be sexy or complex enough to sell newsletters or draw page views, but they’re simple and effective enough to keep you from losing your shirt. The arguments I’m seeing made today for a bottom in crude could have been made for the past 20-30-40 points, and look where it’s gone. The market doesn’t care about why the arbitrary price you picked should be a bottom. It will bottom eventually; but if you continue to ignore the trend, you won’t have any capital left to take advantage when it does. That being said, if you’d like to continue bottom fishing, might I suggest that you wait for prices to stop testing or hitting new 52 week lows daily or for prices to at least make a new 2 or 3 day closing high before taking another stab at it…
On that note. Ladies and gentleman, Miss Avril Lavigne…