Tags: oil prices | investing | crude | markets

Oil Demonstrates Danger of Trying to Catch a Falling Knife

By    |   Friday, 31 July 2015 12:22 PM

In the safety of their own homes, many people have experienced the pain of trying to catch a falling knife.

Occasionally, after reflexively reaching out to stop the knife’s fall, the knife slices through their hand.

If they considered the risk, few would try to catch the knife but when seeing something drop, many people reach for it without thinking.

Sometimes, markets can be like falling knives and without thinking, many investors suffer losses trying to catch the knife. Recent price action in oil shows how this happens.

After falling more than 55 percent, oil rallied almost 30 percent from its March lows. Bulls rushed in assuming the decline must be over.

Rather than rushing in to buy declines, investors should think about how that knife falls. If no one breaks the fall, the knife often hits the floor and bounces before settling into its resting place. That 30 percent rally in oil was the bounce off the floor.

Eventually oil will bottom and it will be time to buy oil and energy stocks to benefit from their expected rally.

The bottom will form when demand is greater than supply, a condition that will be visible on the price chart of oil as it develops.

Consider using relative strength or other technical indicators to find when oil has bottomed.

It’s likely you will miss the actual bottom with these techniques and buy into the uptrend after it is under way.

In the past, following trends has been a profitable strategy and it’s likely to be profitable in the future, even though you’ll miss the bottom and the top.

The alternative to trend-following is knife-catching, a strategy that had led to pain in the past and is likely to result in pain in the future.

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MichaelCarr
Sometimes, markets can be like falling knives and without thinking, many investors suffer losses trying to catch the knife. Recent price action in oil shows how this happens.
oil prices, investing, crude, markets
294
2015-22-31
Friday, 31 July 2015 12:22 PM
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