On Friday June, 29, 2012, crude oil rose a whopping $7.20 but nobody talked about a fat finger or a technical problem in CME. Last month, on August 3, crude rose $4.07 and again nobody made noise about technical problems. Yesterday, crude dropped about $5 intraday to finally close down $2.38 and immediately there was a flood of articles talking about a technical problem in CME or a fat finger, giving the impression that something like that should not have happened.
It happened and speculators who joined the commodity markets in the last two years because of QE should know that it will happen again and again and they will get burned until possibly ruined because this is not how to trade the markets, especially markets where there are major players who call the shots and can pull the rug from under any small trader’s feet at anytime.
It is obvious that mindless speculation it’s not going to work any longer. I mean the perception that after QE3 was announced, buying commodities, stocks and selling the dollar are winning bets. I have already warned about the possibility of the FED intervening in the currency markets to slow a dollar drop and at the same time keep commodity prices in check and prevent another “irrational exuberance” in the equity markets. No, speculation based on QE3 will not be as easy as before and aspiring speculators should be warned before burned.
In my opinion, the next victims of mindless QE3 speculation will be in the currency markets where the FED may intervene to support the dollar in case EURUSD rises above 1.3300. Then, if the equity markets will show any signs of “irrational exuberance”, there may be some kind of a verbal intervention also. This may be the reason why currency traders are very careful and they have not pushed the dollar down hard.
But let me at least clarify who I call a speculator because, at the end of the day and in a broader sense, every trader and investor can be called a speculator. I call speculators those who try to pocket huge gains in a short time by investing large sums of money or using leverage based only on speculation that something will happen. In this respect, a technical trader who risks 1% of bankroll based on the results of an algorithm is not a speculator but a typical market participant. But someone who puts down $10,000 and trades $500,000 of crude oil or currency because he thinks it will go through the roof just because of QE3 is a speculator of the worse kind and deserves to get burned and his funds redistributed to other traders who can use them to bring stability to the markets and facilicate price discovery.
Disclosure: no relevant position at the time of this post.
Charting program: Amibroker (Charts created with AmiBroker – advanced charting and technical analysis software. http://www.amibroker.com/”)