Chart of the Day – Crude Oil Has an “Up Crash”

by Enis July 2, 2012 2:05 pm • Commentary

WTI Front month crude oil rallied more than 9% on Friday.  That was the first +9% rally in the front month contract since  March 12th, 2009.  It’s even rare that you have a one day down move of 9%, though that’s generally more likely to occur, in line with the old saying, “prices take the escalator up, and the elevator down.”  There actually hasn’t been a down day of -9% or more since March 2nd, 2009.

I created a weekly chart of WTI oil over the last 5 years.  I circled in red all the weeks that contained a daily move of 9% or more in either direction.  I could have done a daily chart, but the weekly chart is a cleaner way to illustrate the same point:


Perhaps not surprisingly, the only previous occurrences were between September 2008 and March 2009.  But that is why Friday’s move holds particular interest for me.  You don’t get 9% one-day moves in the price of an asset as widely traded as crude oil because there are enough market participants with divergent interests and views to cap gains or losses on a single day.  When you do get such a large move, it’s usually an indication that many market participants have left the market, and you have fewer participants willing to step in to counter a big move.

Most interesting about the price action between Sept 2008 and Mar 2009 is that you actually had more +9% days (10) than -9% days (9).  So even in a steep downtrend, vicious rallies were more common than vicious selloffs.  This market feels similar, and it’s clear from the chart that vicious rallies are generally only a feature of a long-term downtrending market.

I mentioned in my CotD post almost 2 weeks ago that oil was likely to bounce off $75 support, but the longer-term downtrend was quite strong (Talking Numbers video on CNBC here).  We wanted to be sellers of any rallies, and Friday’s strong up move induced Dan and I to initiate the XOM and OXY put spreads today.  We used different vehicles, but the macro view is the same:  crude oil is a broken market.