Al Brooks @AlBrooksPA
The daily crude oil chart has been in a triangle for a year. There is, therefore, a 50% chance that there will be a bull breakout and a 50% chance of a bear breakout. While there eventually will be a breakout up or down, there is no sign that either is about to happen. The odds favor more sideways trading.
As a trader, knowing the answer to this question does not make me money. I, therefore, think that the answer is irrelevant. My goal is to make money, not to speculate on hypothetical questions. There are many institutions trading the crude oil market. Since the price has been in a tight range for a year, there is clearly a consensus that the price is fair. There is currently no need for it to move beyond the borders of the current range.
Every trading range eventually breaks out. Yet, 80% of breakout attempt fail. To confirm this, simply look at the chart. There have been many strong rallies and selloffs over the past year. During each rally, television put experts on who said that there soon be a strong bull breakout. During the sharp selloffs, TV found experts with equally impressive titles and credentials who confidently said that the bear breakout was imminent.
As a trader, I don’t care what these experts say because they really have no way of knowing. The chart is telling us that the legs up and down are simply tests to see if the bears will continue to give up at the bottom and the bulls will sell out at the top. At some point, there will either be more bulls holding on at the top and buying more, creating a strong bull breakout, or there will be more bears holding on at the bottom and selling more, creating a bear breakout. Until either happens, all we know is that the price is currently fair for both the bulls and the bears.
I have been trading for more than 30 years. One thing that I strongly believe is that there is always both a bull and bear interpretation of every fact. If OPEC extends the cuts, but there is a bear breakout, the pundits will say that the market already priced that in and that the bear breakout came because the market was disappointed by the absence of further cuts. If OPEC ends the cuts, but there is a bull breakout in the face of increased supply, the experts will confidently explain that the rally was because the world economy was much stronger than anyone realized and that demand outpaced supply. This is all nonsense.
No one knows all the reasons why the 200 firms that dominate oil trading buy or sell at any moment. There are too many variables, and most are unknowable, and no one knows the relative importance of each. All that matters is the price. Price is truth. It shows the final vote tally of bull and bear dollars. If there is a bull breakout, more dollars want to buy, and I will see this and buy as well. If there is a bear breakout, more dollars want to sell, and I will sell. That is all that matters. I want to make money. This is how to do it.
Al Brooks, M.D., is the author of the Brooks Trading Course and several books on Price action.
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