I’m about to dig into some pumpkin pie and figured while doing so I would put out some quick thoughts on crude given the recent goings on.
This morning I watched a common theme pick up steam on the Twitter. The theme is really nothing more than a continuation (with growing numbers) of comments I’ve seen for several weeks in this market as we have continued to make new lows. The theme is stating the following: Risk/Reward favors longs here.
In just the last few days I’ve seen this stated at prices of 76, 75, 74, 73, 72, 71, and….well, you get the idea. Appears we are trading 66 and change after making new low prints as I’m typing this. This particular line of thinking becomes especially popular when you wake up to a market that is down 6% and has already been trending down for weeks. There’s just one problem: nobody that is stating this (at least not that I’ve seen) is using any sort of data to verify the argument and my guess is the majority aren’t following any sort of process either. My guess is that its more of a blind trade in the middle of nowhere for many. On the other hand, perhaps many planned to be scale down buyers or were simply looking for quick rotational long scalps…but I’m doubtful of that.
This sort of thinking is born from the widespread belief that “its down a lot, so a long has to be better than a short here” and I’ve seen it used in pretty much every market or individual stock. Indeed, master marketer Mr. Buffett has convinced the masses that “buying when there is blood in the streets” is actually some sort of definable edge when operating in markets, that it is a defined trading plan. It isn’t and, it isn’t. I learned the hard way years ago that repeating trite quotes about the markets is nothing remotely close to an edge…but its a great way to keep your ego involved in your trades as you repeat it to yourself while taking heat.
Look, I’m a speculator by trade and I’m intimate with the concept of responsive selling and buying within the never-ending two-way auction that is the market. This post is not intended to knock other people but to document what I’m experiencing here as yet another lesson in real-time of how the crowd has never met a trend they didn’t want to try to fade. In doing so they provide the fuel and the energy for the trend to persist. I watched this play out on Twitter last year in the gold market (and on a larger time scale since the 11′ highs in that market) and I could provide countless other examples over the nearly 14 years I’ve been trading. By this sort of logic, another great risk reward trade since the middle of 2013 has been shorting stocks.
Be careful out there thinking that this is how markets must necessarily function. A good way to remind yourself is to get away from the futures markets and instead watch a real estate auction or something similar (cars, guns, art, whatever you’re into) where the auctioneer starts with a price that the auction participants have no interest transacting at. See what happens next. You can find many of these examples on YouTube.
As always, best of luck in your trading.