- New Science in old markets -

Crude, Bonds and Lions’ Den

We advised selling US bonds short in the October 15th edition and one day later also advised buying crude oil. Both these recommendations were based on daily-scale extension signals but both markets then generated weekly-scale extensions too:

Crude and bonds weekly

This means that we now expect the effects of these signals to last longer – perhaps for three or four months and so we are not so keen to take profits on these positions after a few weeks, as we would with daily signals.

These two situations also have something else in common as both markets have been ‘managed’ by powerful participants. Central bank buying of bonds has pushed prices much higher than would have been the case without it and the crude oil market has been held in a range by the ‘swing’ production activities of Saudi Arabia. Both markets escaped the influence of their managers lately and this is why we have seen these signals.

Our methods measure the ebb and flow of optimism and pessimism in the mood of the crowd and this gives us good readings of when trends will end. This technique, which tracks established patterns in the mood maps that we build, works in free markets where the main influence is the aggregate mass of crowd action but it works less well, or not at all when markets are ‘managed’ which has been the case here. The crowd took bond prices up to the sharp peak two weeks ago, in a fit of panic about a possible stock market crash, even though central bank buying is ending. Saudi Arabia mishandled its news management and so crude prices dropped through the lows of their artificial range even though it later emerged that Saudi production had indeed been cut in the weeks beforehand. Meanwhile the crowd had sold oil prices down in such a rush of pessimism that a bottom extension developed.

We suspect that oil prices will eventually fall further as we have often pointed out, but not from here – there will be a lengthy pause or rally first.

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