Tuesday, March 1, 2011

Follow Up: Crude Oil Strategy

This article is a follow up to our crude oil strategy.  I first wrote about this quantitative model back on January 18, 2011. 

This simple model remains bullish on crude.  A buy signal was issued October 1, 2010 with WTI crude oil trading at $80.  

Last month, I thought that the model would generate a sell signal.  Prior to the trouble in Libya, crude oil had dropped sharply, and a sell signal seem to be upon us.  However, as this is a strategy built on monthly price data, the best thing to do was follow the strategy and wait until the end of the month.  Furthermore, what I did well was to identify a low risk set up within the context of this longer term strategy.  I wrote about this strategy the day before the Libyan crisis.  I had identified a potentially bullish pattern and a low risk set up.  Three days later crude oil is up over 10%.  

Smart?  Not really.  Lucky?  Better to be.  Moral of the story: stick with your strategies to the bitter end.  I back test for a reason.

In any case, our crude oil model remains bullish.  Past signals have led to significant (plus 50%) gains over the average signal duration, which was 12 months. 

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