Thursday, October 11, 2007

LII is starting to look like a bull trap

I received a comment yesterday from Craig:

My name is Craig, I live in New Zealand and I am a avid reader of your blog. I would like to ask a question if you don’t mind.

I am intrigued by the comment ‘LII is starting to look like a bull trap’, can you be more specific about what you look for to identify a Bull/Bear trap.


My trading platform features a Dome-like order entry, which shows me market depth on the contract selected. When I posted that comment yesterday, oil was trading at 80.20. Usually the Bid/Ask spread in CL X7 (Oil futures) is 1 or 2 ticks. On the picture below you see, that the spread has widened to 4 ticks.


On the chart, you see 3 bars (at 11:55) with a high at 80.19 and 80.20Globetrader_81

So obviously there is a seller at that level. Buyers were able to push CL up from the 80.11 area to 80.20 3 times without getting through at 80.20 (It's a 5 tick-Range chart I use, so CL had to drop at least 6 to max 9 ticks before a new bar would be seen on the chart). On my Time&Sales window I noticed a lot of trades going through at 80.20. Now, when you see the spread widen, it means there are no more market makers willing to step in front, in case CL turns around and starts to drop. Still, as you can see on the chart, there finally were enough buyers, who took all the CL contracts offered at the 80.20 level and CL pushed higher.

Yesterday I got sucked in twice at the highs of a move. I hope I learned that lesson finally.