Corrugated trading

Oil crashed this morning and west texas prices plunged below the $40 a barrel territory. The market hasn't traded this low in a while so we have to look back to previous prices to get some sort of context as to where the market ma bottom out. See the picture below. Using a scale of 1 week on the West Texas Oil chart we can wee where the market has previously bottomed out to try and figure out some hypothetical points of resistance.

It's a bit hard to see but you can see where prices are trading now are nowhere near historical lows, so there should be some more room for prices to fall. In the long term i'll hedge on prices to continue their downward trend. In the short term i'm going to engage in something that i've dubbed as corrugated trading.

If you've ever looked at a pieced of corrogated cardboard on it's side, it consists of two hard outisde pieces and a sheet on the inside which waves arround between the two pieces. This picture fits the analogy of this trading strategy perfectly. Imagine that the WMA's and the outer bollinger bands serve as the outside parameters., and the moving price as the wave of loose cardboard between. Referencing my crude drawing below (sorry) you can kind of understand what i'm talking about.

The concept is rather simple. In this case the price moves up and down between the lower BB and the WMA prices. When the price trades to the lower BB i expect some resistance, and when the price trades up to the WMAs I expect some resistance. The end result is a nice predictable zone where the price will bounce around in until it either moves into the top section of the BB (above the WMAs) or breaks the lower BB and moves downward. This might not work great with currency pairs as the price volatility between the the WMAs and the outside BBs can be a mere few pips making it hard to capture any movement with good trading. With oil however this distance captures a couple of dollars which is plenty of room to make great trades just bouncing between these two conceptual points of resistance.

Beware though, once the price breaks through the outside BB, or through the WMAs you should wait and see as to how the market will settle. See if it continues a similar trend on the upside. Because the market has been so down today I wouldn't take a breakthrough in the WMA as a signal that the price will head toward the top BB. Instead you might want to wait to see if the price comes down below the BB and continues it's trend. Or if it hits the top BB you might want to consider a short.