As seen in the chart below, the CME Group March 2014 ULS Diesel Crack Spread futures is displaying low volatility as measured by its ten-day Average Directional Movement Index (ADX) recent registering of a reading below fifteen, suggesting low volatility and, therefore, a highly unstable consensus regarding the asset’s value. In addition, the spread has been in a clearly defined range since mid-December with $31/bbl. acting as resistance and $27/bbl. serving as support. Although the recent trend has been lower and therefore favors a breakout to the downside we subscribe to the motto, “don’t anticipate, just participate” and therefore favor bracketing the market with buy stops at the $31.00/bbl. area and sell stops at the $27.00/bbl. area. Whichever side gets filled, the other order will act as our intial catastrophic stop-loss level.
That stated, once the market achieves a statistically significant unrealized gain of $1.90/bbl (which was the 10-day ATR as of the 2/6/14 settlement), we favor taking partial profits and moving stops to breakeven on the remainder of the position (and thereafter trailing at the prior day’s high until stopped out on the remainder).
Richard Weissman is a Senior Associate with the Energy Management Institute (www.emi.org) and author of Trade Like a Casino: Find Your Edge, Manage Risk and Win Like the House.