[zoidberg]

What is it with price barriers. Is there something about $140/barrel thats anathema to the oil world? I remember the $100 barrier was flirted with for a long time too. Is it just people being very base 10 or is there something deeper with the way oil is priced? Is there some trading program that changes modes after certain key points?

[Mudpuppy]

The price barriers you are talking about are called `support` and `resistance`, and have a large psychological component. `Support` is as its name suggests a price where people have determined that the price of something is a good buy, and step into buy it. `Resistance` is where people are worried the price is getting too high, (and want to take profit before it crashes).

The same is found in shares, oil, and other commodities. Especially gold and metals as well. Gold will for example hover between $880 and $900 an ounce, and meet support and resistance at those levels.

A `breakout` is when it goes above or below these levels. A `breakout` signals to traders that the direction and momentum is changed and so they pile into it and this accelerates the breakout.

So oil is at resistance of $140 at the moment and seem to find support in the low $130`s. But if it goes above $140 then it is in breakout mode and is inclined to rise towards the next resistance target which is $150.

There is formula`s and rules for calculating support and resistance, but psychology is a big factor. Everyone was timid about breaking out over $100 a barrel for oil until that lone trader did so and then made a $600 loss. But his trade was clever as he knew the market amount being traded was soo weak that he had that power at that time, when all the major trading houses were closed, to force it over $100 a barrel. This broke the psychological resistance and helped it breakout to new and high levels.

There is an argument used in favour of traders and that is that by adding a lot of cash to the market they reduce volatility. For example at Christmas time when the major trading houses were closed down for the Christmas and new years break, that made it possible for the lone trader to force oil over the $100 a barrel mark. The argument suggests that this was only possible due to the thin volumes being traded then, and had the major trading houses been trading this wouldn`t have happened.

Likewise $200 a barrel oil will be a huge psychological resistance target. At the moment the $140 a barrel resiatance level seems a tricky oe for traders to breach.

[smallpoxgirl]

There's various schools of thought on such things. Some people are big believers in Fibonacci extensions. link

[MrBill]

I must admit, I am a big fan of technical analysis. I have seen Fibonacci retracements work too often to dismiss them as random patterns. I also follow Elliot Wave. Candle stick charts. And various other technical tools like moving averages depending on whether I think we are in a trending market or a sideways band or range. I used to like point and figure charts, but collecting the data points by hand takes too much time, and I do not trust electronic data collected automatically, so I had to give them up.

Technical analysis in my opinion works best in retracements and works less well when predicting new highs such as we have seen in oil markets over the past few years. That is to say if we see a move from $50 to $99.30 then calling for the 0.382 retracement to $80.50 is a surer bet than saying $137.25 will be the next high (the high was $135.25) that is the 1.382 extension.

However, fundamental events usually trump technical levels. So after hitting $135.25 and retracing to $121.50 news about Israel's plans to strike Iran first sent crude above $137.25 to $140. It is not that $137.25 was an invalid target, but that once there the market must then decide to either retrace or to go higher.

The psychology is fairly simple in my opinion. At every price there is a buyer and a seller. So one makes money and one loses money. When the price returns to that level the person who made money at that level the last time is more likely to repeat their decision to buy or sell at that level. While the person that lost money at that price is less likely to repeat that behavior. So the range becomes somewhat self-fulfilling.

If we were in a $99.30 to $140 range then traders would make money all the time simply by buying slightly above $99.30 and selling or shorting the market slightly below $140. However, new entrants coming into the market at key levels - often on fundamental news - will be not have the collective bias of past price experience, so they ignore those technical levels. Hence a new range is established.

Also, it is easier to measure retracements and extensions off major bottoms and tops. Of course, those only become apparent after the fact. To see whether a market is overbought or oversold one needs to use Bollinger bands, relative strength indices, trading envelopes or such forward looking methods that measure standard deviations from the mean and momentum. They are also useful tools, but not fool proof. The reality is that they are just another tool and cannot predict the market with any accuracy. The fundamentals are still the most important factor. They just help with market timing.

[Cashmere]

I call em "charters". They're like fortune tellers. If you want to believe badly enough, then they look like they're onto something.

Ask Warren if he's a charter. I'd guess no.

[MrBill]

Yes, indeed, the Oracle from Nebraska is a well-trained economist with a Master's from Columbia. But then again how many Warren Buffets are there? The rest of us mere mortals have to take our entry and exit clues from where we find them.

[smallpoxgirl]

Obviously fundamentals are important. Knowing when a company is going to release earnings for example. The problems with fundamentals, IMHO, are really two fold. In order to really be much use to you, you've got to know the fundamentals before everyone else. Once everyone else has read the earnings report, it's reflected in the price. As a part time investor, I think it's really difficult to get the scoop on something in the way that Buffet would. The second problem is that you've got to be able to accurately predict how the market is going to react to the information. Markets can be spooked by silly things. They often react in silly ways. In order to make money, you have to know not just what the market should do, but what it will do.

The basic tech analysis point of view is, that theres an awful lot of information out there, and I'm pretty unlikely to be the first one to know most of it. Additionally, markets react significantly to the psychological factors of the traders involved which have nothing to do with fundamentals. Rather than trying to be the first to scoop every new piece of info, I can just look at the price and volume behavior of the stock, and that can to a certain extent tell me it's fundamentals. It can also tell me that the psychology of traders is such that there's likely to be a support line at that price where resistance formed two weeks ago or whatever.

There's also an element of time scale involved. The longer your time scale the more fundamentals take precedence over technicals. People will usually behave rationally when forced to over a long time period. For a trend trader like Buffet who's looking to hold a position for years, fundamentals rule. For a swing trader that's looking to hold a position for a few days to a few weeks, technicals are usually more important. People make money with both.

[zoidberg]

The Dow's recent drop below 12000 then could classified under the same category then, as breaking through a support point, are these support points really as simple as finding the closest number with most zeros to the break even point? You'd think with computers and what not these break even points would set to 5 decimal places. Interesting.

Now in a scenario with oil production steady and demand rising or with demand flat and production decling steadily would it be reasonable to see oil jump in spurts, like that one day where it gained $10, and then go sideways and jump again? With the idea that even though theres stready price pressure upwards it wont be reflected streadily because people are waiting for signals everyone can recognize as the flag to buy?

I notice oil is jumping up as the dow is jumping down today. Is it possible this indicates oil is about to break out above 140? And traders are trying to sell off assets they think are going to lose value with energy being higher?

[MrBill]

All physical and financial assets are related to a greater or lesser degree to one another. They change value relative to one another as well as in absolute terms of value. Like tugging on one corner of a spider web. The whole web moves.

Crude took a jump yesterday based on a weak US dollar that also showed up as a rise in gold prices as well. But as smallpoxgirl says these are somewhat random events. You could have days when crude goes down, gold trades sideways and the US dollar rallies based on their own individual fundamentals.

In 'a busy market' many asset classes will move together. Russian equity might get sold-off because of a currency crisis in Vietnam as emerging market investors rein in risk. But in 'a quiet market' investors will discern between the fundamentals of the Russian oil & gas sector, for example, and Vietnam's current account deficit.