From Yahoo Finance an educated view:
“For the time being it’s what we call corrective. … It’s a profit-taking pullback that could still be followed by fresh highs down the road,” said Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates. Ritterbusch said Tuesday’s decline may have gained added momentum when computer models used by large investment funds automatically sold oil contracts once prices fell to a pre-set threshold. “A significant part of it’s technical,” he said of the day’s trading. “A lot of these funds don’t watch supply and demand fundamentals.”
July 9th, 2008 at 3:29 am
A profit-taking pullback is just that, you act because you already know what to do. You’re not going to do supply and demand fundamentals, you’re going to explain yourself. A profit-taking pullback diary is supposed to help you learning faster.
July 9th, 2008 at 8:19 am
Rittherbusch is on to something. We monitor Program Trading in the global electronic Crude markets.
We noticed that Sell Programs kicked in with each downward breach of $140 for Light Sweet Crude.
Once the market began trending down after its last lunch up through $140 the Sell Programs picked up momentum.
As Price is a function of Suppply & Demand, the net effect of these Sell Programs was to increase the immediate supply of contracts which helped push price down.
A graphic of these Sell Programs in Crude can be seen here.
http://www.transactionlevelanalysis.com/2008/07/michael-covel-ritterbusch-on-s.html
Hope that you found this interesting.
July 9th, 2008 at 10:06 am
From my understanding of this, the larger the fund, the harder they find it to move in and out of their (larger) positions, so the less they are driven by the technical, at least on a day-to-day basis. I am not saying they ignore the technical, but they will certainly use far different time-scales. For this reason they will often scale in and out of positions as on any given day a market can only support so much liquidity, so larger funds may only be buying and selling the same amount as the smaller funds daily, it’s just that this amount can be the entire position of smaller funds/individuals rather than a small percentage for larger firms. It’s these long and short term capital flows interacting that give us the price movements.
For want of a better analogy think of the waves versus the tides - the large firms buying and selling are like tidal flows, taking longer to play out, smaller firms are the waves, their buying and selling is over far faster and more frequent. The difference is that we can predict the tides pretty accurately as there are only a few major component parts to consider, whereas the markets consist of many different players with many differing objectives, none of whom offer anything like the single influence over proceedings as the moon does on the tides.
July 11th, 2008 at 12:27 pm
So the fundamental guys look at supply and demand of oil, and the technical guys look at supply and demand (as measured by price) of the oil contracts. They both look at supply and demand of something. But the fundamental guys always say that technical trading doesnt work. That would imply that the basic economic laws of supply and demand don’t apply to oil contracts but they do apply to oil. How rational is that? In a free market how can the laws of supply and demand apply to one thing but not another? Something for fundamental traders to think about…
July 11th, 2008 at 12:44 pm
Don’t you just love the guy who says the market is down due to “profit taking.” how many times, ad nauseum, do we hear this phrase every time the market goes down??? is there no one who ever sells and books a loss? is FRE down today due to profit taking? if so many of these boneheads were taking as much profit as these pundits claim, they all wouldnt be in the toilet with crappy performances that they have.