CL Redux

10 days ago oil is at 87 , all of the sudden Alaska pipe broke big funds pumped the price to 93.
- then Alaska pipe got fixed and fear of Chinese inflation (hence less oil demand from china), these two factors took oil from 93 to 86 just in 4 trading days.
- s&p was same 1280 level 10 days ago as it is today.
- big funds and Market makers combined do these pump and dump to catch small guys all the time
- as you asked, to reach 90 it only takes 3 days from this 86 level
- theory behind it I am posting below

 

What is Volume Spread analysis?

Volume spread analysis is a new way of looking at the market. It more like the candlestick analysis taking into consideration the volume. However not all the candle stick rules apply here.

The basic premise behind the volume spread analysis is that the market is basically moved by the “Smart Money”. The smart money accumulates the stocks at low prices. Then begins process of marking up the price. Then the “Dumb Money” starts entering the smart slowly. The smart money starts passing the ownership of the stocks to the dumb money. This process is called Distribution. Soon more and more dumb money starts rushing into the market not wanting to be left out of the big rally. Unfortunately the retail traders are the last to get in. Once the process of distribution is complete the smart money starts rapidly marking down the prices and the dumb money are left holding the stock which was bought at high prices. At the end the smart money is much richer and they can again start accumulating the stock at lower prices. The cycle continues.

This one way explains why the move moves are slow and the down moves are very rapid. The process of marking up the prices and distribution is a slow process. It takes some effort to get the dumb money interested in buying into the rally. The mark down process is very rapid as the smart money’s intention is to trap the dumb money. They have to give very little chances to dumb money which is generally slow in reacting to exit.

VSA attempts to read the moves of the smart money by looking at the price, volume and the spread of prices.

I know most of you are eager to get straight into the core of VSA. But let us lay some foundations before building the blocks of VSA. First thing is of course to understand a little more about working of Smart Money (hereafter we will just use the term SM to indicate Smart money).

The SM basically moves the market in four phases as follows

1. Accumulation
2. Markup
3. Distribution
4. Mark Down

Most of you may be fully aware of these. Still we will look at these phases more in details as this would help us to understand the SM operation better which in turn would give a better perspective to VSA.

There will not be any demand for something when there is plenty of it available and nobody wants it. As the availability decreases and more people want it then the demand increases. So the first thing the SM does is find something that is available a plenty and cheap. The next step is to create a scarcity of the same and get people interested in it which in turn generates the demand. This is first phase which is Accumulation.

Accumulation is a process through which the SM acquires a large quantity of the stock at the lowest possible price. Accumulation is a subtle, sophisticated and sly process of cornering a huge quantity of the stock that makes the following phases possible and worthwhile. Once a large quantity has been absorbed the number of floating stock reduces and the demand increases. This makes possible the next phase Markup.

Accumulation normally takes place in congestion areas. Congestion area are mostly sideways range bound movements where the stock appears to have no interest to either move up or move down. The SM ensures that the stock is contained below a certain upper level which is the supply area. At the same time the SM also supports the prices above a certain lower line which is the support area. The stock moves within an upper resistance or supply area and a lower support area.

The congestion areas are characterized by Indecision. One of the most important characters of congestion areas is the Low Volume. When most traders are bullish or bearish the volume is high. Low volumes indicate indecision among the traders on bullishness and bearishness.

Ah.. Sounds easy…….. Well the problem is that congestion areas are seen in both accumulation areas as well as Distribution areas ……… oh , Well that is not the only problem………. There will be periods where no one seems to be interested in the stock… the pattern of price movement most of time very similar to the congestion pattern…..

 

Open outcry of pit closes at 2:30EST, a good deal of spreaders and longer term traders put on positions in open outcry, and of course day traders as well. And I suppose arbitrageurs too between the mini and full contracts.

 

Based on VSA theory we ran day-4 of MARKdown phase at 86 price level
- now based next one week up coming events big funds know when to start new ACCuMULACATION phase
- of course Stating new ACCumulation phase is not straight forward, we may have few days of side way days based on equity markets and economic news etc..
- infact side ways price action is part of ACCumulation process where big funds and MMs load big chunks waiting for right time ( oil pipe line break/Iran conflict news etc ) to do rapid MARkup in few days

 

INVESTVISION.............thanks for the interesting post on volume spread analysis

 

Or else they keep their new tradeable inflation target in check and USO goes to zero in just over 4 years (it could happen with CL unchanged and with that 2% monthly contango...)

 

This pinhead thinks oil is going to retrace to 81.67:

 

Breaking the long-term trendline...? The pressure on front month CL is palpable, but those trading related markets (calendars, crack, Brent) will not let it diverge too long. Doubt if CL even runs for the stops below 6M TL. It is mostly Fed-related IMHO. Same story as with ES until yesterday. It leaped like a beach ball from the sea...

 

We're now moving up off the 6 month trend line which held as support yesterday to the tick. Anyone trying to play true breakouts yesterday at that trend line left empty-handed, or paid a small fine for trying to cross that line :eek:

As I post, price has retraced yesterday's range 50% (86.98) off the low.

87.27 is Monday's low and will likely act at least briefly as a resistance zone if price breaks out the current morning's high.

 

Will a build of 5 mlb's be enough to break that line? I guess even if it does we would need for it to close below it for the day for it to count. DXH1 barely clinging to 78 but I'm buying it again, I couldn't care less about what the fed says.