Wednesday's headline event wasn't the mid-day reversal in equities. And much to the chagrin of tick-chasing momentum traders, it was neither the after-hours selling in Yelp (YELP) or Citrix Systems (CTXS), nor the buying in Tractor Supply Company (TSCO) or Select Comfort (SCSS).
What captured my attention was the early afternoon collapse in front-month December 2014 crude futures. For those who don't actively trade or follow crude oil, just know that the weekly inventory report (released every Wednesday at 10:30 a.m.) noted a huge build in crude stocks. And as you might expect, this resulted in an immediate drop in crude prices.
However, after a mere five minutes of selling, supply and demand appeared to fall more in line, and prices began to rise. Like many traders I suspect, I was actively stalking a rebound through $83-$83.15 (the session intraday high) to get long. But rather than get long, I sat at my desk watching the contract transition from under moderate pressure, to downright collapsing. Instead of recapturing the $83 level, the contract plummeted toward $80.50. Suffice it to say, crude bulls had a rough day.
I believe it's nearly impossible to know for sure whether the bulk of the recent selling is a result of the Saudis lowering their target selling price on crude, the abundance of crude being found within our own borders or a genuine slowdown in the global economy. Logic dictates that it's likely some combination of all three.
What I do know, however, is that two weeks ago I couldn't find a soul on earth that didn't think oil needed to stabilize before equities would bounce. Thanks to a quick 100-plus handle rally in the E-Mini S&P 500 futures contract, that no longer appears to be the case. Now, most participants appear content to ignore the selling in oil and write it off as something we no longer need to worry about.
This, I believe, is a big mistake.
Paul Tudor Jones once famously said: "Every day I assume every position I have is wrong." Right now, I believe every trader operating on a timeframe greater than a single day, regardless of directional bias, should begin the trading day by staring at the Es and asking themselves: what might bring fear back into the equation? Because when I shared my view that the markets might be due for a decline early Wednesday morning with some fellow traders, the most frequent response I got was: what do you think could possibly act as a catalyst for any such decline?
I began by listing the observations detailed in Wednesday's Trader Daily. But in the end, I couldn't help but point my finger at crude and scream. If the weakness in energy is more about slowing global growth and deflation, we have some serious issues to contend with in the weeks and months ahead. And the Es sitting less than 4% from all-time highs probably doesn't come close to factoring in said concerns.
From a technical standpoint, the last three major declines in crude registered roughly -34% (May to August 2011), -30% (March to July 2012) and -18% (late-August to late-November 2013). Based on those declines, it seems reasonable to look for crude to trade between $75 and $70, if only for a short while, before the current downtrend ends and the contract transitions toward a more balanced state.
- For those that missed my Wednesday morning update in columnist conversation, please note that I did cut my long position in the First Trust ISE Revere Natural Gas ETF (FCG) by more than a third at $15.70. For now, I plan to maintain my stop beneath $14 (on a weekly bar close). My next two upside areas of interest (to pare back the position further) are $16.50 and $17.75.
- Please check columnist conversation prior to Thursday's open for an updated E-Mini S&P 500 futures (Es) volume profile and daily trade plan.
Any trading or volume profile related questions can be posted in the comments section below, emailed to me at firstname.lastname@example.org or posted to my twitter feed @ByrneRWS.