You Can Observe a lot by Just Watching

Normally I post investment opportunities after-the-fact as those charts tend to hold a lot more information and are much better learning tools. Everything else up to that point of confirmation is just a “potential” opportunity that holds some level of interest. My level of interest grows or falls depending upon a number of factors, one of the highest being the development of high probability patterns. 

So it goes with today’s post, oil has formed an almost perfect bullish inverse head and shoulders reversal pattern from an oversold divergent low. There are, of course, no guarantees but my experience is this setup has produced some of the biggest returns. The first of its two targets is just above at the 60 area and if that level is breached, I see a potential retest of the 75-77 area. Notice how the (red) 200 day moving average contained price on the way down and how it is now acting as support on the way up.  This is symmetry in action. Price bounced right off the moving average on its first pullback after gapping above it in April. RSI momentum is rising and has a lot more room to the upside if price wants to push higher. An investor couldn’t ask for a better setup. And yet I am hugely skeptical and a non-believer.

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This is not because a confirmation break above the blue horizontal neckline has yet to occur but rather because oil’s fundamentals, quite simply, suck! Too much supply, stagnating demand and world economies that have flat-lined (at best). This is NOT the sort of backdrop that we want to see if we are betting on higher oil prices.   So I should pass on the investment, right?

This is a great example of a bias. Everyone has them, even those who are not supposed to, including me. Based upon the fundamental backdrop, I have formed a belief (justified or not) that oil prices can’t move higher. The fact is anything can happen and if I pass on this investment I am committing to make one of the cardinal sins of successful investing. This is exactly how retail investors act and why they consistently under-perform the market.  A better approach might be to take the investment opportunity (once confirmed) but manage your risk (biases) by reducing position size. Instead of committing say 5% of your investment capital, reduce it to say ½ or 2/3rds of normal. You never know this single investment could be the difference between this year’s portfolio performance being a winner or loser. My mentors, some of the most successful market traders/investors all agree in that typically in any given year just 10-20% of their investment ideas make up 90% of their annual gains. The rest are either no impact or turn out to be losers. This is why a good investor cannot let their biases enter into their investing process.

In case I have done a poor job, this post is not really about oil and the potential big move to the upside (well, maybe just a little) but rather about accepting our natural human biases/beliefs and managing the biggest obstacle to investment success, that person in the mirror. To take liberty on one of my favorite Yogi-isms …. Investing is 50% process and the other 90% is mental.    

As an aside, as I get ready to submit this post, oil inventory data is being released in a couple of hours which can move the price oil dramatically in both directions. So it’s a good time to remind everyone that news always trumps the charts. ALWAYS