I'm not a gambler, but I do know better than to reveal my cards in the middle of a poker hand. Occasionally, a large market participant will show their hand. It usually ends poorly.
Consider the Swiss National Bank's decision to support the Swiss franc. In 2011, the SNB announced a plan to buy an unlimited amount of euros to maintain the euro/franc exchange rate at 1.20 or higher.
By revealing their buying price, the SNB inadvertently drew a line in the sand. Everyone knew there was a massive buy order at 1.20. Traders knew exactly where to press, and the SNB failed miserably (arrow):
Chart Source: TradeStation
Revealing one's hand can have unintended consequences. When the Swiss franc crashed in 2015, several brokers became insolvent, and the SNB reported a first-half loss of $50.1 billion.
On the other hand, if you don't name a specific price, there is no line in the sand to cross.
This brings me to this week's U.S. announcement to refill the Strategic Petroleum Reserve between $67 and $72 per barrel. This action effectively puts a floor under the price of oil.
Now that every market player knows that a massive buyer is lurking at $72, the price is unlikely to reach $72. The U.S. has drawn a line in the sand.
This seems to be a strategic error. How can we fix it, and refill the SPR at a lower price?
Imagine that you're an oil trader. You see the price falling toward $72, where the U.S. has stated it will buy. You know the presence of a huge buyer will prevent the price from falling further, so you buy above $72. If enough buyers step in above $72, the price begins to rise again. Thus, $72 is never reached.
How can the U.S. win in this scenario? By refusing to buy at $72.
When the price is nearing that level, and buyers are preventing the price from reaching $72, make a statement to the effect that you now believe the price will fall lower.
State that you no longer intend to buy between $67 and $72. Don't name a specific buying price.
Traders that went long above $72 will have to quickly re-evaluate their positions. They will sell, creating an air-pocket where they once thought the U.S. would step in to refill the SPR. This will cause the price of oil to drop sharply.
How far could WTI crude oil fall? According to the chart, if oil gets below its next support level of $75 (point A, black line), it could fall as far as $52 (point B, red line).
Chart Source: TradeStation
With the price in the $50's, the U.S. can quietly start buying. Make purchases in small quantities, to keep the price low. Avoid buying at one specific price, as that will become visible on the chart.
Vary the purchase sizes and timing. Be unpredictable, and make no statements on the matter. Keep everyone guessing as to what you're doing, and how long it will continue.
By drawing speculators in, and then erasing that line in the sand, the U.S. can create a scenario that leads to refilling the SPR at a better price than currently proposed.
