The Story On Most People's Lips - Oil

This week has proved to be a very interesting week indeed. I have had the pleasure of watching the markets go by from Singapore and two things have dominated the news here. The Dow Jones rallying and holding above 10,000 points and the price action in oil hovering above the $40 US a barrel. One thing that dominates the news channels here in Singapore and a number of Asian countries is the financial markets. On numerous TV channels I could access constant price updates and commentary on the position of markets.

The constant reference to oil and its inflated prices has prompted me to take a look at the price action of light crude oil. This futures market is traded in the United States on the NYMX exchange. Some traders may not have realised the futures contract on oil is the most liquid of all futures in the trading world. The volume is currently averaging around 90,000 contracts traded per day.

The contract specifications are quite interesting, the initial margin for a contract is $3375 USD and there is also a mini contract available that can reduce the initial cost to trade. The contract controls 1,000 barrels of oil and the minimum movement is $0.01 and equates to 10 USD per contract. Another point to note is that the contract is deliverable so keep in mind if you are going to trade oil you will need to be sure to close your positions before expiry, as 1,000 barrels is a lot of oil.

The chart below CL-SPOTV details the recent price action available in the world futures download and enables analysis in your software. The ABC traders out there will note on the chart the recent ABC long trade. Entry orders were placed at $37.45 with a target of $39.44 as the 100% exit. This movement was achieved in 4 trading days a movement of $1.99 or $1990 US per contract.

Money management rules could be difficult to adhere to with a risk of $950 USD per contract; therefore to take 1 contract in this trade you would have required a minimum of $9500 USD in your account.

Gann based analysis works best on markets with high participation and of course good liquidity. This market certainly meets those criteria - that being said it is a great market to apply time based tools as well as price. Using zero date analysis on the recent high on May 24th of $41.82 and running some time frames back, some harmony becomes apparent.

The chart below uses David’s time by degrees tool to measure important time cycles.

The main intervals we look at, like quarters and halves of cycles, have delivered strong turning points especially November 25th last year. The time frames of lesser importance have also signalled some strong short term movements as circled in the chart.

Whether you are using price alone or in combination with time, the oil market is one that we can apply our analysis skills.

Good Trading

Aaron Lynch