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The Price of Oil Driving Stocks
The current dominant theme of the market (and pretty much anyone that consumes) is the price of crude oil. Since most of what we consume has to be transported by vessels that use a lot of fuel, this translates into higher prices for these goods. What's more, everyone is accustomed to driving an automobile (which also uses an oil derivative) to get to their jobs. Whereby, money is earned to purchase "stuff", made from petroleum by-products. As a result, everyone is in an upheaval over this situation. What also tends to happen when conditions reach a crisis level is people begin looking to lay the blame on something or someone for the high prices, as if this would make the situation better. Indeed, things are getting quite bad out there, to the point that talk of outlawing speculation in the oil market is being bandied about. Yes, they're talking about criminalizing speculation! Wow! Just when I thought, I had heard everything. Rest assured, this will never happen – I hope.
Let's shift themes now and discuss some observations I've made in many of the classes that I've taught recently. When teaching the E-Mini Futures class, I first cover the basic fundamental information needed to trade the E-Mini stock index futures. On day two, we start right in on trading the live markets. I talk through my trading style and show the class where and how I enter and exit trades. I do this because they all want to see how the Pros do it. My intent is not to have every student in class clone my trading style, but rather to show students that finding low risk trades and executing them are the hallmarks of any good trader. Most of the students that attend the E-Mini Futures class have already been through several of the classes that Online Trading Academy offers, so they've had the opportunity to see other instructors and their styles. Some students become confused because they see different variations of trading protocol and are not quite sure which style they should try to emulate. To address this issue I suggest students take pieces of every trading method, and try them out until they find a methodology that fits THEIR PARTICULAR PERSONALITIES. This is vital, because if you trade a style that is not your own, it will not work. This is why the black box approach doesn't work for most people - because the system was not designed by you or for you.
To endeavor in trading is to embark on a journey of self-discovery. Unfortunately, for many people the markets are a very expensive way to find out who they really are. This is an important part of the learning curve for new traders and must be an integral part of your progress (learning what works and doesn't work for you). Moreover, when you finally find a method that suits you, you'll know, and it will begin to reflect in your improving P&L.
Let's switch gears once again and look at the technical picture of the ER2 (E-Mini Russell 2K). Since my last newsletter, the ER2 has made a new recovery high (to 748.50). In the daily chart shown below, notice this price was just shy of filling the open gap left in December. Also noteworthy is the continued strong uptrend over the last two months. The ER2 has now rallied over 100 points since the March lows, despite all the ongoing concerns about oil, the economy, etc.
In the shorter time frame (Hourly chart below), the Russell has been trading in a near perfect linear channel. Yesterday's rally broke the upper channel, which is positive, although, oftentimes price tends to revisit the "breakout" zone. All in all, the market generally still looks positive for the time being.
In summary: The equity markets have largely ignored the steep raise in oil prices, that is, until the $130 a barrel / $4.00 a gallon benchmark was breached last week. In my last newsletter, I noted that the price of oil would become the major focus for the market in the short run. This has certainly been the case. Recently, some very influential people in the oil business have called for the price of crude to reach $150 to $200 by year's end. If their forecast comes to fruition, where does this leave the stock market?
Thus far, the market has held up remarkably well in light of these developments. However, if the price of oil remains elevated for an extended period of time, this will be a drag on the equities market. My sense is that a pullback in the price of oil is overdue and consequently the market should continue to move higher.
Until next time, I hope everyone has a profitable week.
If you have questions, comments or you'd like a specific topic covered, please email me at gvelazquez@tradingacademy.com
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Gabe Velazquez is a professional
trader with 14 years of experience. His focus is intra-day and swing trading the
ER2 (Russell 2000 e-mini) using technical analysis as his primary tool. Gabe has
managed both stocks and futures accounts as well as conducted educational seminars
on technical analysis for the past ten years. He is a frequent guest on Biz radio,
where he shares his market knowledge and utilization of technical indicators.
Gabe also teaches the