Oil Trade And QQQ Update

I would like to put out a short update on the oil market and my view of the QQQs being a proxy for the Hi-Tech end of the market. With the hard sell off in the oil market of this week this would seem a logical place to give it a rest and for a short seller to step over to the sidelines for a while. Anytime the market has gotten itself to this level of being oversold we have seen a rip to the upside.

One of the keys to being a successful short seller is to know when its time to press ones bet. Extended moves to the downside come from oversold levels and I am going to show you why I believe we may have further to go to the downside before this current move is over.

You should recall we executed our first short position in oil in the beginning of March just prior to oil falling out of the descending triangle. Keep in mind the dynamics of a descending triangle is where the ceiling of supply gets lower as time progresses. Each time price rises it meets selling at a lower level. Note below once the triangle got established the higher volume bars were red indicating sales volume. This was an in-your-face bearish announcement to anyone who cared to listen. But typically not many care to listen to the language of the market… so they were “surprised”.

Looking a the chart above I have described it as a super-ball bouncing down the stairs. When a ball is rolled down the stairs the amplitude of the bounces increase with each progressive bounce. The reason for this of course is potential energy is being converted into kinetic energy. We see this dynamic in the chart above. This is not just a coincident metaphor, but a market principle in energy dynamics. Recall how the oil price stayed in a bounded channel for 24 years between $10-$40 from 1980-2004. During that time it was coiling energy so when it finally broke out it had the propulsive power to run to $147 over the next 3 years.  These physical dynamic images are useful in understanding markets.  So what that means for us now is this market still has downward energy in it.  The second bounce we saw occurring in the month of May was strictly based on OPEC-hype narrative. It immediately fell apart after the OPEC meeting.

Here is what this move looks like within the the bigger picture of the entire bounce off the lows of Jan 2016. We see how we built out a H&S right on the lower boundary of the rising wedge—Classic. Also note how RSI, although low does not limit a move further to the downside.  Stochastics are flatlined on the bottom NOT showing any case for an immediate upward move. MACD Histograms also do not have a pulse. Bottom-line there is not yet any sign of a bounce taking hold in this chart.

The OPEC Narrative

I understand this site focuses on the charts and not the narrative, however I believe its useful to have knowledge of what’s going on behind the scenes. Besides, that’s how Plunger rolls when it comes to how I construct trades. You must know that Saudi Aramco is positioning itself for a major IPO of its assets. Recall that an IPO is how insiders cash out of a market and “unload” their assets onto the public. This deal is in the works. It is estimated that this will be the biggest IPO in history. Valuations are in the $2 Trillion neighborhood. Obviously, the higher the oil price the bigger the IPO, so we can see how imperative it is for the Saudi’s to keep the oil price up.

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Disclosure: None.

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