Home > Oil, WTI > The Case for SCO

The Case for SCO

To better explain how the system used on this site works, let’s use SCO, the Proshares Ultrashort Bloomberg Crude Oil as an example.

One aspect of the system is to look at support and resistance in terms of Murrey Math. At the end of July, SCO made a low of $35.90. That low was of interest because of how it related to Murrey Math.

8/8 – 100.00

7/8 – 87.50

6/8 – 75.00

5/8 – 62.50

4/8 – 50.00

3/8 – 37.50

2/8 – 25.00

1/8 – 12.50

0/8 – 0

At $35.90, SCO was only $1.60 below $37.50. Why does $37.50 matter? $37.50 is the 3/8 Murrey Math Level between zero and $100.00. That zero to $100.00 range encapsulates the vast majority of SCO’s price movements for the last two years. An interesting aspect of Murrey Math is that price will spend approximately 43% of the time trading between the 3/8 and 5/8 levels. So, 1/3 of the levels, or 33%, accounts for 43% of the time that price spends moving between 0/8 and 8/8. That means that once the price crosses above $37.50 there is a decent chance it will remain between the 3/8 and 5/8 Murrey Math Levels for some period of time.

Another way of looking at SCO is through the lens of the Negative-Positive Ratio (NPR) and Positive-Negative Ratio (PNR). One way to look at these ratios is to make an analogy to double-entry bookkeeping. For every entry on one side of the price ledger, there has to be a corresponding entry to balance it. With the NPR and PNR ratios this is done by a calculation that seeks to balance the total actual positive or negative price movement for any one trading day with the potential opposite potential price movement for that same trading day. This is different than simply assuming that a stock price increase of $1.00 must be balanced by a $1.00 decrease.

seesaw-41961_1280.png

Imagine a seesaw or teeter-totter. On one end of the seesaw sits a little girl, Sally. Sally, that little beam of sunshine, is the Positive-Negative Ratio. On the other end of the teeter-totter is bad boy Billy. He’s the Negative-Positive Ratio. At any one moment either sunny Sally or bad Billy has the upper hand. But, soon enough, the other child reverses the direction of travel of the other.

Now, transpose little Billy and Sally and their teeter-totter onto the undulating wave of prices.

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Not only do you have the up and down of Sally’s positivity with Billy’s negativity, but you also have the overall trend, either up or down that influences the price. So, the two ratios – NPR and PNR – achieve a sort of balance but only within the context of an undulating price wave. At any given moment, Sally and Billy on their seesaw, are not only traveling up or down the price wave, but also moving up and down around the pivot of the teeter-totter.

The Positive-Negative Ratio and Negative-Positive Ratio are expressed as decimals (or percentages). There are actually several steps in creating the ratios. First there is the calculation of the raw positive and negative day numbers. The positive day raw number is divided by the negative day raw number to get a Positive/Negative (P/N) number. The negative day raw number is divided by the positive day raw number to get a Negative/Positive (N/P) number. Then the P/N is divided by the N/P to arrive at the Positive-Negative Ratio and the N/P is divided by the P/N to arrive at the Negative-Positive Ratio.

The NPR and PNR Ratios can be looked at in terms of a modified Murrey Math that looks like this:

6/6 = .9375

5/6 = .78125

4/6 = .625

3/6 = .46875

2/6 = .3125

1/6 = .15625

0/6 = 0

The 2/6 to 4/6 range is expected to be somewhat analogous to the 3/8 to 5/8 Murrey Math Levels, although the exact percentage of time the NPR and PNR ratios is expected to stay within the 2/6 to 4/6 range has not yet been calculated. Potential price reversals could happen at the 4/6 or .625 level and the 2/6 or .3125 level. Extremes of 5/6 or .78125 and above and 1/6 .3125 and below could mean at least one of two things: First, price has reached an extreme and is expected to reverse direction, or; Second, price is strongly trending and will continue to trend until some stronger force causes it to reverse direction.

As far as SCO is concerned  a case could be made for a strongly trending price (although current data is extremely limited). On August 8th the PNR stood at 0.802785911. The price that day closed at $37.77 (above the 3/8 or $37.50 Murrey Math Level). The next day price closed at $37.06 and the PNR was 0.64694451. Since then, the PNR has generally trended lower, but price has generally been trending higher. Yesterday, August 21st, price closed at $40.04 and the PNR was 0.528564954.

Given the very limited PNR and NPR ratio data on SCO, it would be handy to have another method to look at price to determine what the potential trend is. Fortunately, there is such a method – the Balanced Price Range (BPR). The method of calculating the BPR is not something we are going to discuss in any great detail today. It is a fairly complex series of calculations. It requires looking at each day’s price close versus the previous day’s price close and making further calculations using algebra to determine what the extreme low and high price levels for any given stock, index, commodity, etc. should be.

The current Balanced Price Range for SCO is $27.20 to $43.36. Given the previous close of $40.04, that still gives SCO some room to move higher. On August 8th the SCO BPR was $35.46 to $39.74. Over time, the BPR can widen or narrow. The entire range can also shift lower or higher. For example, on August 20th SCO closed at $38.20 and the BPR was $25.36 to $41.52. On August 21st SCO closed at $40.04 and the BPR was $27.20 to $43.36. The BPR can also give a signal to go short or long. For example, on August 14th SCO closed at $40.24. However, it’s BPR was only $30.65 to $39.68. When the closing price falls outside of the BPR, then that tends to be a signal that price will continue to move strongly in the same direction (higher or lower). In the case of SCO, since it closed above the BPR, the expectation was that it would continue to move higher. On August 16th SCO closed at $41.38. SCO has since moved lower than $41.38, but for the most part has remained above the $39.68 level which was the top end of the BPR on the day it closed above the range.

How you use the BPR is really only limited by your own imagination. Had you been a commodities trader watching the BPR for SCO on August 14th it would have given a compelling signal that the price of WTI Crude was going to reverse strongly since SCO was signalling that it expected the price of crude to move lower. Currency Pairs also from time to time will flash signals that it is time to go short or long. This happened very clearly with the USDCAD on June 27th when it closed at 1.319, below the BPR of 1.325 to 1.3315. By July 26th the USDCAD closed at 1.246. EURCHF also gave a signal to go long on the same day, June 27th as the USDCAD gave the signal to go short. EURCHF closed at 1.089 on that day. By July 31st the EURCHF stood at 1.143.

Returning to SCO, it does appear that the BPR gave a buy signal on August 14th when the price closed at $40.24 which was above the range of $30.65 to $39.68. Generally, price has remained above the $39.68 level  since then which could be viewed as indicating that level provides some support. Additionally, the $37.50, or 3/8 Murrey Math Level, offers some additional support. Once price crossed above $37.50, it opened up the possibility that price would trade between the 3/8 or $37.50 and 5/8 or $62.50 levels for some time. The $50.00 or 4/8 Murrey Math Level should be expected to provide some resistance to upward price movement. However, should price move and hold above that level for a few trading sessions, then that level would become a new floor of support. Additionally, the Positive-Negative Ratio can be viewed as making the case that SCO is in a price trend higher as a move lower in the PNR has not significantly damaged the upward price trend.

Full Disclosure: Author is currently long SCO.

Click here to learn the basic elements behind the Probable Price Range (PPR).

Disclaimer: The information provided here is for informational purposes only. It should not be considered legal or financial advice. You should consult with an attorney or other professional to determine what may be best for your individual needs.

Author does not make any guarantee or other promise as to any results that may be obtained from using this content. No one should make any investment decision without first consulting his or her own financial advisor and conducting his or her own research and due diligence. To the maximum extent permitted by law, author disclaims any and all liability in the event any information, commentary, analysis, opinions, advice and/or recommendations prove to be inaccurate, incomplete or unreliable, or result in any investment or other losses.

Content contained on or made available through the website is not intended to and does not constitute legal advice or investment advice and no attorney-client relationship is formed. Your use of the information on the website or materials linked from the Web is at your own risk.

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