Now oil is down 2.5%.
Of course $62 is going to be bouncy, that's our shorting line and, according to the fabulous 5% Rule™, a 5% drop gives us 1% bounces (20% of the drop) and we're down $1.60 from $63.60 so 0.32 bounces to $62.32 (weak) and $62.64 (strong). If we fail to hold the weak bounce and head back to $62, there's a good chance it will fail. Failing at $63.64 is a bit trickier as we could be consolidating for a move up or down – it requires patience.
If we fail $63.64 and then fall back below the weak bounce line and consolidate between the strong and weak bounce lines – THEN we can anticipate a break lower. How much lower? At least half of the previous drop so another 1.25% to $61.66. Now that we KNOW how much the potential reward is, we can calculate the potential risk and decide whether it's worth the trade. Clearly, at $62.25, I can make a bet that $62.32 will fail and set a stop at $62.35, risking a loss of $100 per contract if we stop out at $62.35. The next test would be at $62.60, with a stop at $62.70 – so another $100 risked but the reward of a drop back to $61.66 would be $1,000 gain per contract.
We've been playing the Oil Futures (/CL) with conviction and, although we have a nice $10,000 gain this morning – it only makes us even as we've had to double down our two shorts twice. Now we're at goal as all we ever wanted to do was get back to even and get back to 2 shorts – but now at a much higher basis ($62.24) for a long-term play.
Conviction shorts are very different and require a lot more risk tolerance – they are certainly not for everyone. Our conviction is that next week's OPEC meeting will not do enough to keep prices over $60, so we're positioning for that.