One of the most fascinating developments over the past 3 years has been this incredibly tight range-bound market that we’ve had in Heating Oil futures. I first brought this up a couple of months ago suggesting that we wait for a breakout before getting all excited. But I’m starting to creep into the camp that anticipating this breakout might not be the worst idea.
Normally I would say that with a base this big, we might as well just wait for the first higher high before entering. The old saying is, the bigger the base the higher in space. Meaning, that the longer it takes for a base to build, the longer the ensuing trend should last. We’re now going on over three years of this base. Look at this thing:
These consolidations tend to resolve themselves in the direction of the underlying trend, which in this case is up since early 2009. So I’m inclined to anticipate this breakout a bit as long as prices remain above 285. This level represents the recent lows in the second quarter. Below that price things get messy and would suggest that somehow even more time is necessary to complete this base. Otherwise, I think a breakout is coming soon.
You see, what happens is that in a tight range like this, nobody wins. The bulls are frustrated and the bears just as much. So market participants just start throwing in the towel and they move on to something else. But when the consolidation eventually resolves itself, all of that built up demand gets exposed and that’s when they start to rip them higher. I think this is precisely what we’re seeing here.
I love this market. I love the fact that there is essentially zero correlation with the US stock market. This really helps with diversification. Because obviously the last thing we need is another correlated asset.
Whether you anticipate or wait for a breakout is all up to you, your time frame, and your risk parameters. Whether you use futures, options or ETFs is another decision that we need to make depending on who we are and what our goals are. This post is simply to point out the massive base that has developed in this market. I just want to reiterate that this is easily one of the most fascinating developments in the world. As you guys know I look at all global stock markets, commodities, currency crosses, bonds and individual equities. This one excites me most.
REGISTER HERE for more information on how to access all of the Commodity charts with commentary updated on a weekly basis
Tags: $HO_F $UHN