If You Were Long Crude, You May Now Be Broke!
On Tuesday, I wrote an article titled "How Low Will Crude Go?", where I suggested that a break of the $90.00 level could unleash a selling barrage to the downside in oil. At the time, NYMEX crude futures were holding just above that level, and a break seemed likely. The speed and magnitude of the sell-off once prices traded through $90.00, however, has been staggering.
On Friday, just three days later, NYMEX futures are trading at $83.28, down nearly 4% on the session. Essentially, it has been absolute carnage in crude as the commodity looks to close out its worst week of the year, making it five straight down weeks in the oil market. On the weekly chart, crude is in free-fall mode and really strong support might not come into play until the $75.00 level.
Thus far, the moves through key levels have been clean and powerful as the sell-off began above $105.00 back on May 3rd. Prices plunged through $105.00, then took out $100.00 without looking back. Next to go was $95.00 and $90.00, where there was very little price support whatsoever.
Given the nature of the futures market, and the tendency for big and small players alike to employ significant leverage in taking positions, any type of procrastination in exiting long positions established at higher levels likely has resulted in disaster. This is exactly the type of action in which hope, stubbornness, and a lack of discipline can result in catastrophic loss.
It is fairly obvious that large longs are being stopped out left and right in crude oil and this is amplifying the action to the downside. In futures, where significant leverage can be employed, these types of dynamic moves to the downside can gain momentum as stops are triggered and traders frantically hit bids in an effort to get out and hopefully avoid ruin.
Conversely, traders who have used the sharp breaks from the major levels listed above to get short may have made fortunes. As volatility across markets picks up, so do the opportunities for substantial trading profits. In the absence of strong risk controls and firm stop-loss levels, however, these are exactly the kind of markets that can cause involuntary retirement from the trading business.
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