Time of day
Assuming that we can use YM to trade CL, the next question is one of timing. Time of day is critical, but it’s also an issue that is difficult to pin down universally as the most effective period for one mix of trading style, risk tolerance and funding might not be the most effective for others. That said, three times of day generally are riper for profits in the crude oil market: 7 a.m., 9 a.m. and 2 p.m. (all EST). Another good time might be 3:30 a.m., but this hour of the morning is prone to extreme volatility, which can generate mixed signals and confusion.
Of the three most effective periods, 2 p.m. (EST) tends to offer the most widespread opportunity. This is when the market is about to close and CL often makes a major move — and more importantly has the greatest liquidity — either to the upside or downside if the underlying drivers are in place.
In “Calling crude” (below), we can review the YM and CL markets for Thursday, Oct. 3. As we can see, YM established an intraday top around 1:45 p.m. (EST) and proceeded to drop. We got a good clue that prices might slip as trading unfolded thanks to the three equal highs within a four-bar period. This indicated short-term resistance. Next, reviewing CL, we see that the contract also appeared to hit a top. This is a shorting opportunity that could have earned a trader a 30- to 40-tick profit. (Each point on the CL contract is worth $10.)
Note again that YM and CL operate in tandem, which is evident in this example.
In most cases with this trade, a 20- to 25-tick profit is possible. During the late fall and winter months, it is difficult to get much more of an intraday price swing out of crude. Alternatively, during the peak summer driving season, around 50 ticks might be possible out of this market. In any case, consider establishing a 15-tick stop loss when you open the position.
We can see another example in the following day’s trading. “Higher power” (below) shows YM and CL on Friday, Oct. 4.
Around 1:45 p.m. (EST), YM established a short-term floor at 14,976, registering three consecutive equal lows. When this occurs, the market is telling us “no more,” and it often goes in the opposite direction. Now let’s look at what happened to the CL contract. While the YM set a foundation for an up move, CL also began an advance. This trade could have netted the trader a 40-tick profit. However, again, during this time of year it is usually prudent to take profits off the table once they reach the 20- to 25-tick range.
Another advantage to trading crude oil at this time of day is the major economic news typically has been reported and worked into the market. This includes the Energy Information Administration’s weekly inventory report.
There are days when economic news is reported in the afternoon. On days when there is an afternoon Fed announcement or auction it’s best to stay out.
Nick Mastrandrea is the author of “Market Tea Leaves.” He can be reached through the website: www.markettealeaves.com.