Because of lower liquidity crude oil trading is generally more volatile than the ES. However on Friday we saw some excellent trades using a combination of the power indicator and the accumulation distribution indicator.
Beginning at approximately five minutes after the open on Friday and continuing until about 0930 EST, the ZoneTraderPro accumulation distribution indicator indicated heavy distribution was in process. This set up and exhaustion trade which called the top for the day. The ZoneTraderPro power indicator had been steadily falling into the trade. As price was rising the indicator was giving a sell signal in all three time frames.
Immediately following the exhaustion trade which was good for 15 ticks, this trade was followed by a series of trend short trades.
At approximately 1130 we again see and exhaustion trade calling a top followed by a perfect set up for a reversal trade pattern. We again see the accumulation distribution indicator indicating that contracts are being distributed.
After the market fell another 60 ticks we finally see a series where the accumulation distribution indicator is telling us that an accumulation is underway. There is a clear trade in this picture. There is a long counter trend trade at 1255 hours which worked out for more than 20 ticks.
Notice how after reaching the blue countertrend zone at $45.85 the power indicator was deep green and the distribution indicator was red. That indicates to me a seller who had significant contracts to sell, and once his supply was exhausted, price rose.
This is clearly a very hard call to make if you were long from this position. Because at this point you do not know who is going to win this battle, a big seller or a very strong commitment from buyers, as evidenced by the power indicator.
The new power indicator can be used with other instruments also, including crude oil trading. Crude oil trading has different characteristics than the ES because there is less liquidity and more volatility. But that doesn’t mean that the same rules can not be used successfully trading crude oil.
This first chart is from July 5 at the open. What is important to look at is the accumulation distribution indicator down in the lower pane. Notice how the indicator 3 minutes after the open shows distribution. Then at 0913 hours the indicator again began showing distribution extremely close to the high of the day.
This indicator is not a timing indicator. It is showing what the current sentiment is, and after 0913 hours, it was clearly bearish.
Now lets look at the actual trade setup. The trade setup is a short trend trade, which is setup when the price first trades to the blue counter trend zone and then retraces to the red intermediate zone. The buy sell power indicator is very weak and can only register a 55% buy when the indicator zigzags.
Note how hard the selling was as price reached the blue zone. That strength carries the market down another 20 ticks. What is important to see here, besides the absolute strength, is what the indicator does in all 3 panes. A sharp V pattern is formed, but it immediately stabilizes and goes sideways while showing dark red. This is what you expect to see to take a market lower. Remember this point for the exit to the trade and compare the two charts. This will take the market sharply lower and it represents the smart money move of the day. In about an hour the market is down 140 ticks.
The last piece of this puzzle is the ZoneTraderPro currency tool. The currency tool is a composite of several forex currencies that highly correlate to the CL market. Doing the correlation is a time consuming process but worth the effort. There is a different correlation solution for the ES. You would not use the same values for the CL and the ES.
Note the slope of the indicator line from 0909 hours and how the indicator is setting up dark red going into the trend trade at 0931 hours. The rest is a history and a great setup to learn and use.
What did the chart look like an hour later. Again the accumulation distribution tells us the market is accumulating. Price will spend over an hour down here, but the smart money has moved from sellers to buyers. Again the accumulation distribution indicator is not calling the low, it is just telling you what is happening.
What is calling the exit is again the buy sell pressure indicator. Notice how when price is trading at $45.20 at 11:00 hours, the indicator is deep red and getting even redder. A buyer was there taking every contract thrown at him as the market tests the low. This is the opposite of what happened to get into the trade. This is not an example of a long trade entry, it is an example of a trade exit. This buyer could run out of contracts he wanted to cover and then the selling could take the price sharply lower. The previous low was a long exhaustion trade, again signaling a bottom.
The currency chart goes dark green twice 25 minutes before the eventual exit. That is very close to the eventual low at $45.20. The entry was clearer than the exit. But you can see how the indicator is showing how that it is divergently higher at 1100 hours. Or if you took profit then, you didn’t have to sit through over 30 ticks of retracement. Also note the ZoneTraderPro buy patterns indicated at that low.