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.