Oil markets set up another ‘triangle’ pattern

Brent Jula11.pngAs promised yesterday, the blog looks today at the impact of high frequency trading (HFT) on oil markets.

This now takes place in micro-seconds. It is algorithm-driven via ‘black boxes’, and so fast that as Andy Haldane of the Bank of England notes:

“Around 40,000 back-to-back trades can take place in the blink of an eye. If supermarkets ran HFT programmes, the average household could complete its shopping for a lifetime in under a second. Imagine.”

It also creates ‘bunching’, where all the black boxes try to out-trade each other. As we discuss in the upcoming Chapter 3 of our eBook, Boom, Gloom and the New Normal, the finest mathematicians and physicists in the world are now employed to develop Wall Street’s version of computer games:

• First, they aim to block the competition
• Then they execute their trade. In micro-seconds.

However, the recent end of the Fed’s QE2 programme has reduced the liquidity on which these computers relied.

As the chart above shows, oil markets are now tracing out a triangle pattern, just as they did in Q4. Only this time, the triangle’s top line (red) goes back to July 2008, whilst its bottom line starts in December 2008.

This makes it an even more significant pattern than the short-term one seen in Q4 last year.

The key question is whether oil’s recent run-up to $125/bbl constitutes what traders would describe as a failed ‘test’ of the previous high set in July 2008. If it does, then Sperandeo’s trading rules would suggest a major trend change could be underway.

Either way, the triangle pattern suggests we could well be getting close to another major price move – upwards or downwards.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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