Thursday  Evening  12 November 2009

Crude Oil has retraced all the way back to its breakout, an area we have described in detail previously,
on 19 October, Crude Oil - Picture Perfect Breakout.  We went long, then exited on 23 October,
Crude Oil - Standing Aside.  There was one more buy attempt that failed for a small loss a few days ago,
but after seeing the market sell-off into the support area, getting long Jan Crude Oil at 77.95 this morning
may be a reasonably "safe" trade.  Whenever a market pulls back to its point of breakout, it is a retest of
the breakout, and a "safe " place to initiate a new trade.

Why?

A breakout is a clearing of former resistance which then becomes support.  Because it is a recognized area
of support, buyers will defend it to keep the technical structure positive.  If price is allowed to drop too far
back into the breakout area, sellers will see that as a sign of weakness.  Now buyers will have to defend
against even greater selling efforts.  Easier to defend the breakout area and avoid additional selling at
lower levels. 

The breakout is labeled on the chart below.  As well, selling probes testing the breakout area, have been
identified.  There are additional reasons for buying this most recent retest.  The sell-off lows that have
been holding 76.50 - 77.00 have formed a trading range since the breakout high at 82.50, on the Jan
chart.  One of the best ways to trade a trading range is to sell the upper 25% area, and buy in the lower
25% area.  Mention of this rule has been made in a previous article, Crude Oil - Buy , from 3 November.

This strategy presents a lower risk entry, for obvious reasons, as long as the trading range remains
intact, and there are no guarantees of that.  Getting long at 77.95 puts the trade at 24% of the entire
range.  If today's low holds, 77.26, that puts the position at the bottom 16% of the recent low range.
This is establishing excellent trade location.

Why not wait for a lower retest?

Answer:  What if a lower retest never comes?

To show why the entry was taken, we go to the next chart, a 10 minute intra day chart.

There are a few other things to keep in mind.  The trend is up in the larger time frames, both weekly and
daily.  We know that the chosen long position is in harmony with the primary trend in the time frames
identified.  Trading WITH the prevailing trend is a cardinal rule that cannot be broken.  Not if one wants to
trade successsfully over a period of time.  Non-professional and novice traders break this rule at will.  They also do not last very long in this business.

The smaller time frame 10 minute chart is used for timing  trades selected from the larger time frames.
What becomes immediately apparent is that the 10 minute chart has no trend, but is in a defined trading
range, 81.60 high to 77.22 low.  We can now show why waiting for a possible lower price level retest was
not a high probability.

You can see the 77.22 low established during the opening 10 minute bar on 3 November.  In fact, we
went long the Dec contract at 77.25, and subsequently sold half the position at 80, and the other half on
a sell stop at 78.85 on 6 November.  Now we are back at the same trade location entry, and within the
current 10 minute trading range, buying at Jan 77.95 is within the bottom 17% of the range. 

Why there?

Great trade location in an uptrending market.  You can see the support line near the bottom of the chart.
Price was right there, today.  The decision was made after seeing the 4th bar from the end.  Crude Oil was
down over 200 points on the day.  Note the 5th bar from the end: a wide range down with a weak close.
It does not pay to buy weakness. 

But, we bought even lower.  Wasn't that also weakness? 

Depends upon your point of view.  Look at the volume and close of the 5th bar, and compare it to the
volume and close of the 4th bar.  The fourth bar had greater volume, and the close was above mid-range
on the bar.  This tells us that when selling volume increased to the highest level of the day, the down bar
range was smaller and the close was as described, letting us know that buyers came in and supported
the market.  If there were no buyers, the close would have been much lower.

Also, look at the low of the 4th bar and scan to the left to see where the low was last Friday.  Almost
exact!  The same lows from last Friday and the Tuesday before that led to sharp rallies.  Once we saw
that market activity develop, we could read the "message of the market."  It was not guesswork, but
factual observation that buying came in at support.  We went long as soon as a new high occurred on the
intra day chart, and that was at 77.95 area, during the 3rd bar from the end.

What we could not know when we went long the little breakout is how price would develop from that
point on.  You can see the not so strong close on the 3rd bar, and that told us to expect another retest
of the low, then 77.45.  Price actually made a new low, 77.26.  We had sell stops at 77.15.  They held.

We drew a small horizontal line off the first low, and labeled the newer low as a failed probe.  In other
words, the market went lower but did not find any more sellers.  Maybe some weak sell stops, but selling
dried up.  With no more selling, price had to rally, and rally back it did. 

The sell stops remain in place.  If the Crude Oil market is to continue its trend, we expect price to hold
and work higher.  If it does, we enjoy a great edge in the selected trade location.  Everything was done
for a reason and with purpose, based on reading present tense market activity and drawing conclusions
from those factual observations.  There is no guarantee the trade will be profitable.  There could be one
more low, and the process would be repeated, or price could continue lower without rallying back.

What we know for certain, in an uncertain environment, is that the decision-making was well-executed,
and as long as that caliber of trade decision is exercised, on balance trading will be profitable.  One can
only do their reasoned best.