Following Up On Crude Oil And Stocks- Get Accustomed To Volatility

Following Up On Crude Oil And Stocks- Get Accustomed To Volatility
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On January 7, I posted an article, Did We See The Bottom In Crude Oil On Christmas Eve? In that piece, I pointed out that the low volume low on December 24 stuck out like a sore thumb and had the potential to be a bottom for the energy commodity. Christmas Eve and the day following the holiday saw the price of crude oil and stocks to fall to levels that created fear and uncertainty in markets. These emotions are the ingredients that often result in lows in markets while greed can take them to highs.

While NYMEX crude oil hit its bottom at $42.36 on Christmas Eve, US stocks and the price of Brent oil waited to Boxing Day, or the day after Christmas to fund their bottoms. 

Source: ICE/RMB

The daily chart of March Brent crude oil futures shows that the price of the benchmark that two-thirds of the world uses to price their oil production and consumption declined to a low volume low at $50.31 per barrel. The now expired February Brent contract fell below $50 to a low at $49.96 on December 26.

With stocks and crude oil plunging to lows on the days surrounding the 2018 Christmas holiday, Santa may have left coal in the stockings for those market participants holding long positions in equities and the energy commodity. Meanwhile, Saint Nick was not such a bad guy last year as the low prices and capitulation in markets created some very profitable opportunities as of January 9.

The S&P 500 index found its most recent bottom at 2316.75 on December 26 and put in a bullish reversal on that day. On January 9 it traded to a high at 2,596.75 or over 12 percent higher in just ten trading sessions. The gains in crude oil were even more significant. 

Source: CQG

It took eleven trading sessions for WTI crude oil to move from $42.36 to $52.58, a gain of over 24 percent, and ten sessions for Brent crude oil to climb from $49.96 to $61.68 per barrel, 23.5 percent higher.

WTI crude oil took almost three months to fell from $76.90 to $42.36, a decline of just under 45 percent. Markets typically take the stairs to the upside and the elevator lower. However, the recent rebound in the price of crude oil occurred at a faster pace than the decline, so far. While many market participants are breathing a lot easier over recent sessions as asset prices have recovered, we should not get too comfortable as wild price variance has a good chance of changing the direction of markets a lot more often over the coming weeks and months than we have witnessed in the past.

Volatile markets create opportunities, but they do not support a buy and hold mentality. A continuation of price variance in crude oil, stocks, and many other asset markets means that opportunities will increase for nimble traders with their fingers on the pulse of markets. In the current environment, a logical and disciplined approach to risk-reward is a necessary ingredient for success. Keep those stops tight and take profits when they are staring you in the face. Never be afraid of missing an opportunity because volatility increases the number of chances to profit. 

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