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Recent moves in the US dollar have followed on to the commodities space. The crude oil market has delivered a neat double bottom pattern that is balanced in price and time, with a move from $75 to $86 so far.
Novice traders often prefer to trade equities as they perceive commodities markets as too hard or dangerous. While I sympathise with this point of view, improving your knowledge will conquer these fears. I will be making regular comments on commodities at www.tradingtutors.com and I recommend you follow these to expand your understanding.
Nevertheless, if your price action analysis has indicated a move to the upside on crude oil and you are wondering how to take advantage of this within the equity space, you might consider a company like Woodside Petroleum (WPL.asx), which often moves concurrently with crude oil. Having said that, I do not like to rely on a stock as a proxy to oil all of the time as such harmonies can be unreliable.
If you suspect there is a move afoot on the crude oil market, start stalking a potential set up on the stock, most likely trading it through a leveraged instrument, like a CFD. A quick check of the WPL chart shows it has made solid gains off the back of a rising crude oil price. The trick to this type of analysis is to be organized and ahead of the game rather than reacting to information.
Chart 1 illustrates a great ABC long pattern that formed a Point C in early October. The signal to go long on WPL came from the ABC long trade where Point A was formed on 26 September, which was close to a seasonal time for those more advanced in their studies.
With the A to B range expanding, the B to C range contracting and the retracement at 48%, this ABC pattern looked good on the small picture. The volume had some positives as well but I will leave that to you to research. The weekly trend was down and this may have concerned the beginner, again understandably so. We will look at that issue shortly.
Chart 1 – Daily Bar Chart WPL
click chart to enlarge
Chart 2 illustrates the entry could have been either routine or more advanced, depending on how you looked at it, but the day following Point C was an outside day, a good one for the record that took us into the trade on 4 October. The entry price would have been around the High of C + 1 (or approximately $31.92). A change of stop loss points based on the new Point C would have also been required.
Chart 2 – Daily Bar Chart WPL
click chart to enlarge
Now let’s consider the reasons we could have expected a trend reversal and therefore a trade against the weekly trend. (As an aside, the greatest development I see in novice traders is when they see the value in a bigger picture analysis.)
The next two charts illustrate the massive benefit of ranges resistance cards and lows resistance cards. Chart 3 and 4 show how using the range from 2003 to 2007 and the low in 2003 suggested the lows on the recent double bottom were here to stay.
Chart 3 – Monthly Bar Chart WPL
click chart to enlarge
Chart 4 – Monthly Bar Chart WPL
click chart to enlarge
Chart 3 and 4 are monthly bar charts and if you recreate these and zoom in on the daily chart, you will see how Point A rests nicely on these levels. When we see the ABC pattern meeting our checklist like this and the big picture showing strong support, we can disregard the single negative of the weekly trend not being in sympathy.
These are many more price and time techniques that confirm the upside potential and in chart 5 we use the first range out repeating on the last swing range at 100% as an extra confirmation.
Chart 5 – Weekly Bar Chart WPL
click chart to enlarge
With all swing trades there needs to be a balance between perfect checklist items and big picture support or resistance. This is a great example of an excellent ABC trade that may have been rejected based on a checklist item that could have been overcome by using techniques from the Number One Trading Plan on the big picture.
Good Trading
Aaron Lynch
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