An informative 'story' for traders by Stanley Kroll

On how "those who know don't tell, those who tell don't know"

The best way to introduce this important subject is with a story —

a true one.

My friend, Tony, who was one of the major floor brokers on the New York Mercantile Exchange, and I were sailing on the waters of Long Island Sound, New York. It was a hot, windless summer afternoon and we had been drifting along for half an hour, waiting for

the anticipated two o'clock southerly wind to pick up and send us scurrying down Long Island Sound for an exhilarating afternoon of sailing. Neither of us was an avid conversationalist and we had exhausted our normal topics, which is probably why we got involved in

the conversation I am about to relate.

Now, all my friends know my cardinal rule, that I never want to hear anyone’s market opinion, nor do I care to give my own. But here we were, all of a sudden, talking about the heating oil market. Actually we weren't talking; it was Tony talking and me listening.

‘I'll give you some very confidential information,’ he said, ‘but you must promise not to tell anyone.’ ‘Look,’ I replied, ‘I'm not interested in your tip, so please keep it to yourself.’ I thought that would

discourage him.

Wrong. It didn't take him more than a minute to recover from that mild rebuke, and he started again. ‘Be serious,’ he said. ‘I'll let you in on it, but don't tell anyone that I tipped you.‘

He was really determined, I thought; it must be something really special. And it sure was. 'Sheikh Yamani will shortly announce that the Saudis will double their oil production.’ A long pause ensued. ‘So what,’ was the best I could respond. But Tony was persistent. ‘So what?

ls that all you can say? Don't you realize the significance of this news? When the oil minister of the world’s leading oil producer is about to announce that he will be doubling production, the market is sure to drop by US$20.00, maybe even US$50.00 over night. There's a fortune to be made here, and I've just dropped it in your lap. Besides, all the big floor traders have gone heavily short.’

l have heard all I cared to hear. Besides, who wanted to have this nonsense ruin what would soon be a great afternoon of sailing? ‘Look,’ I retotted, ‘I don't know very much about the Saudis or their oil minister, or about oil production and its effect on heating oil prices.

And I certainly don't know, nor do I care, about the "big boys" and what they do, or don't do in the market.‘ (Actually, I had heard so many ‘big boys’ stories through the years, that I was totally immune to them.)

‘What I do know, though, is that this market is now heading sideways, but with a bullish bias, and in my opinion, it looks like it wants to break out on the upside and rum into a roaring bull market.

So, can we please talk about something else, now?’ Well I finally prevaied, although I had never seen this unflappable professional trader look so stunned. But my gambit rescued the day, and the balance of the aftenoon turned out just fine.

The afternoon’s conversation was very much on my mind that evening and, upon retuming home, I wasted no time setting out my charts and technical studies for a careful re-examination of the heating oil market. Perhaps there was something in this scenario that I had overlooked or misinterpreted, and a careful double-check seemed like a good idea under the circumstances.

It was mid-July 1985. and the heating oil market had been locked within a tight trading range, between 70.00 and 73.00, basis the February 1986 future. Although the majority of traders were heavily short, some of the objective computer systems had already signalled to cover shorts and go long on 10 july, and I was just waiting for a close of over 74.000 — and the strong market action ‘told me’ that this breakout was likely to be imminent — to tum me full bore onto the long side, with the expectation of a major upwards move in the offing. Let

the 'Big boys’ and their hapless followers exchange tips and gossip regarding Minister  Yamani’s anticipated announcement and its possible effect on the market. As far as I was concerned, I was anticipating a bull market, period!

Yamani either would, or would not, make the announcement; and even if he did, the bearish news was probably already been discounted in the market price. And the announcement, if there was to be one, would in my opinion, be the final ray of hope for the trapped bears

prior to their being massacred by the strong and rampaging bulls. In short, my technical studies ‘told me’ that we were, once again, about to see the classic ‘bear trap’ in action. Discretion being the better part of valour, I opted to sit out this bear tip from the safety and serenity of my long position in February heating oil.

This was fortunate for me because, following a few more weeks of sideways price action, during which time the ‘big boys’ and their followers had ample time to get further committed on the short side, the market on Friday 26 July closed strong, just below 74.00 for February. That did it! The trap had been sprung on the unfortunate bears, and following one last gasp brief price reaction, the market commenced an impressive rally that ultimately carried some 16.00

cents, equal to US$6,70O per contract (see Figure 4.1). "

What was even more amazing was the fact that Sheikh Yamani did, in fact, announce that he would be doubling oil production (Tony was at least right about that part of the tip) and predicted a sharp drop in price of the market, however, is the ultimate authority, and was not

impr with this bearish tip. In its frantic race towards higher levels, it barely stumbled over the oil minister's 'epic' announcement. This must have shocked the intrepid and greatly pained shorts who, in the end, lost tens of millions of dollars due to their blind acceptance of a

beau‘ tip in a bull market. There is a very clear-cut lesson to this story: beware of tipsters and

other financial gossips bearing free market information or well-intenrioned advice. And when the fundamental and the technical conclusions are at odds, you disregard sound, objective technical conclusions, or hang on to anti-trend market positions, at extreme peril.

At all times, it is necessary to focus on an objective analysis of market trends and high volume breakouts from existing trends. Successful operators have trained themselves to ignore, and admittedly that‘s not easy, the hysteria and sounds of alarm that accompany the plethora of

supposedly informed market pronouncements and tips.

Figure 4.1 February 1986 Heating Oil. During June and July 1985, the market was locked within a tight trading range between 70.00 and 730%. Despite major short positions on the part of many floor traders anticipating a bearish announcement from the Saudi oil minister, the

market broke out on the upside on July 26, commencing a major bull move to the 90.00 level. This resulted in losses of many millions of dollars to the big guys and their hapless followers, who had been caught in the classic bear trap that they had so often engineered in the past. Their mistake? Following a bear tip in a bull market.