Wednesday, September 2, 2015

WTI's Volatility and Speculative Bubbles

Wednesday's markets seemed to switch roles that have been playing out in the past week. Global stocks have found a way to stabilize, taking Chinese economic data in stride as investors continue to have confidence in their money. The Dow Jones Industrial Average settles at 0.40% with buying and selling pressures canceling out. Volume levels have slowed down to half of what the crash had brought along. Crude oil contracts have, instead, taken on the volatility that the equity markets experienced just over a week ago. Today, WTI October 2015 contracts opened at $44.26 with an intraday range of $3.56 before closing at $46.05. Commodities traders speculating heavily on fundamental implications caused major spikes in price movement with no clear direction. Brent saw similar movements and showed its fourth gain out of five sessions like its WTI counterpart. Whipsaw movement is not typically healthy, but after long summer losses, traders seem hopeful as streaks of bullish sentiment peak out from the losses. Some of this activity seems justified, though, as the Energy Information Administration continues to produce information that reflects inaccuracies in supply data as well as insecurity in equilibrium prices. As a result, speculation has created bubbles in the daily and weekly prices. We'll look at WTI to see examples.


Here we have the past five trading sessions plotted with significant price movements fitted with a bubble that approximates length of time and range in price. The bottom of the bubbles starts on the price that acts as the high or the low for the new price movement. As the bubble begins climbing, its vertical diameter increases with the constant widening of the horizontal diameter. With the leveling of the move, either a circle or an oval will emerge to define the long-term or short-term movement that tells the technical story through the values of the diameters. Near the end of August, WTI showed impressive price trends on the 28th and the 31st which grew to fit a sizable bubble beneath it. Even though a bubble is placed in the space below, the jump is not a speculative bubble. If the trend fails to wrap back around the circle, it's a legitimate trend. The idea is that speculation fabricates value where there is none so a full or major retracement. Small or no retracements will follow a serious move. In the red zone, price movements today produced small speculative movements with entire retracements in the opposite direction. Typically, one speculation bubble signals volatility in a trading session. Two bubbles might signal traders that their money isn't safe there. Speculation bubbles can tell an investor if there is value in a security and if movements are meaningful. Counting the number and amount of speculative bubbles versus solid bubbles (ones with meaningful price trends) can tell a trader if volume has been value-based or supported by sentiment. Further development of this idea will be discussed in later posts. Volatility can be dangerous to any investment, but tracking significant price trends is crucial for profit-making.

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