Who Should You Listen To?

Each day lately I see, hear, and read industry experts, ivy league professors, elected officials, and just about any average person with an opinion talk about two markets with certainty. What the masses are saying is that Crude Oil and energy is a buy right now and that Interest rates are for sure going up significantly this year. If this information is true, I had better make some big decisions and market moves now.

I have been in the financial industry for over 20 years now and one of the many things I have learned and witnessed is that when the masses are all thinking an event will happen, it is often wise to consider the opposite. Gold is a good example… 3 years ago as it moved from $1600 to $1800 an ounce, all you heard was how it was for sure moving to $2000 and beyond. Cash for gold stores started popping up everywhere. I think at one point I even saw a drive – through cash for gold in Chicago. “Buy gold now” is all you have heard over the past 3 years or so. However, in online trading sessions I have delivered for the past three years, we have been very bearish on gold as the chart was telling us long term demand was much lower near $1050 an ounce. For the past three years gold has been in steady decline and is nearing our target. Did we have access to special information on gold? No… The key is to have a razor sharp focus on the REAL supply and demand equation.

Interest rates are a hot topic and on this one it is hard to find anyone who doesn’t think interest rates are headed higher in 2015. When we look at the chart however, the higher interest rate scenario is by no means guaranteed. In fact, I know we are only three weeks into the new year, but all that has happened from January 1 is interest rates have gone down. Several of Europe’s central banks have cut key interest rates to below zero. Also, is there really this big demand for money that would drive interest rates higher? Large corporations are sitting on stock piles of cash and, as far as individuals, I don’t see this huge demand for borrowing money. Where opinions don’t matter is the price chart. The chart reflects the real supply and demand equation in any and all markets and the larger time frame bond chart doesn’t suggest significantly higher interest rates anytime soon.

Crude Oil and other energy markets is the other hot topic lately. People are calling Crude the buy of a lifetime at current levels but again, the chart is not suggesting that. Below is a screen shot of a live trading and analysis session from last week that I was leading for Online Trading Academy students. During the session, I was going over Crude Oil and the only question people were asking was, “Where is demand and when should I buy?” Really think about that question and then think about what really causes market prices to turn higher and rally. The only way price can turn substantially higher is if the majority sells and price has reached a fresh larger time frame demand level. This is because what causes price to turn higher is a lot of demand and no supply. When everyone is focused on “buying,” they are bullish and that means price can’t rally significantly.

During the session I identified a fresh supply level in Crude (yellow box, Rally-Base-Decline) and sure enough, price rallied up to that level near the end of the session where I was able to sell short. The strong rally in price back up to the supply level probably happened because with any decent rally in Crude people think it’s the big bottom and they have to jump on, notice, the mass mindset is bullish. That allowed me to sell short to the buyer who was buying after a rally in price, at a price level where banks were selling Crude, and all this was in the context of a major downtrend. I simply applied our rule based supply and demand strategy and sold short just like banks do and achieved a profit of over $4,000.00 on the trade. No matter what the perception is, when price is at retail levels (supply), you want to be a seller, just like a bank or successful buyer and seller of anything does.

The chart in the background is a larger time frame chart. Notice the circled areas, they represent fresh supply zones. This again suggests that it will be a very long time before prices are back above those levels. Sure we will see rallies in Crude but all that fresh supply needs to be filled before prices can go higher and there has not even been one rally to begin to absorb all that supply. So, back to the title of this piece which is the main question, who should you listen to when making key buy and sell decisions on a major market move. Most will listen to mass perception and consistently be on the wrong side of major market moves or miss them. What you may want to do instead is focus on the market’s real supply and demand message that is found on the price chart. I know it sounds too simple, but never underestimate the power of simple.

Hope this was helpful, have a great day.

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