Exploiting Failure

Do right,

JR Crooks

That’s my sign-off when I write about the markets.


It’s a reminder and a nod to Jesse Livermore, who made the point that successful trading is about doing right rather than being right. Livermore did a lot of right.

Being right is merely a psychological perception whereby doing right is a physical, measurable truth. (Depending, of course, on the yardstick you’re using.)

Or something like that.

As it pertains to the markets, being right does not necessarily correlate with making good decisions. On the contrary, being right often impedes a trader’s ability to do right by his wallet.

Being right does not necessarily correlate with making good decisions. On the contrary, being right often impedes a trader’s ability to do right by his wallet.

That’s because being right comes with a whole lot of baggage: Rationalization, ego and fear come to mind.

The funny thing is, this baggage shows up in the markets — in the price action.

A good trader — focused on doing right — recognizes the baggage and works with it.

A bad trader — hell-bent on being right — fails to see the suitcase knocking him upside the head. Oddly enough, every failure brings another suitcase.

Let’s try to exploit those failures by uncovering one pattern in crude oil and gold that’s full of baggage.

Crude Oil

In case your head has been stuck in the shale and you don’t already know, crude oil caught a whole bunch of traders off-guard with its recent rally from $30 to $50 per barrel.

Nothing new.

The same thing happened when crude oil extended its collapse from $70 to $30 per barrel in 2015.

And the same technical pattern — one overflowing with failure — was in play each of those times the consensus was fooled by oil.

While I didn’t specifically notice the pattern back in May 2015, it did catch my attention this time around.

For some technical background, Elliott Wave Principle calls this pattern an "expanding flat." An expanding flat is kind of like a pennant or narrowing triangle pattern, only in reverse.

But the resolution of each pattern is the same: a continuation of the primary trend.

Here is the expanding flat in crude oil circa April 2016:

And here is the expanding flat in crude oil circa May 2015:

If you’re looking hard to see the "failure" in those charts, consider the "b" and "c" waves in the second chart.

Wave b tested the previous low. At that level, traders with long positions were stopped out or chose to leave because the new low "proved" them wrong.

But then wave c comes along and makes a new high. Those traders who took short positions when wave b made a new low have now been "proved" wrong by the wave c high.

Of course, when wave c makes a new high, new long positions materialize as well. Some are brand-new buyers; some are getting back in because they believe their previous bets on the wave a bounce are being vindicated.

Either way, these new long positions didn’t stand a chance when the three-wave correction ended and the primary downtrend resumed.

The expanding flat is simply a three-wave correction. And if you follow me, you know I like playing three-wave patterns.

The expanding flat looks nasty because it is. Yet the psychology is the same as in any three-wave correction:

Traders fear losing their gains; they fear missing out on the trend; they doubt the trend, change their minds and refuse to be proven wrong. Turns out they rationalize bets at precisely all the wrong moments.

All right, so what can you do with this?

First, keep your eyes open when you look at the charts.

Second, think about where failure — "being right" — might be rampant and how you can exploit it. If you’ve done your psychology homework yet your idea feels like a tough trade to swallow, you’re probably on to something!

Related story: Mind Control is the Key to Great Investing

Third, look at this chart of gold:

Based on typical measurement for an expanding flat, I expect to see gold dip further to $1,185 an ounce, more or less.

Then a significant extension could be in order. Wave 3 typically extends 100% of Wave 1 … and often even extends 161% of it.

If you think about the context of this move in gold, many traders made gains on the rally and many others probably missed most of the move.

Then gold pulled back in March.

Those who missed the previous rally decided this was a buying opportunity — they wouldn’t miss the boat this time around. Now they’ve had their hats handed to them, and conviction in gold’s uptrend (and a sizeable portion of its gains) is all but squashed.

Lots of egos are getting slapped around here, what with gold pressing down on $1,200.

Seems like there will be a good opportunity to buy back in soon!

Do right,

JR Crooks

Your thoughts on “Exploiting Failure”

  1. JR, for quite a long time you were warning us about a precipitous decline in oil to $5. What’s your thinking now?

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“JR” specializes in trading commodities, currencies and options. He has spent nearly 10 years analyzing financial markets and writing about global economics. JR honed his trading techniques and global-macro worldview alongside his father, Jack Crooks, at Black Swan Capital. JR also…