EQUITY RUN UPDATE: $11,038.
It happened fast. It happen strong. It was RBOB Gasoline, September delivery and in the October delivery a bit also.
The move was, as it often is the case, a reaction to an “act of God”, namely hurricane Harvey, which effectively shut down the refinery industry on the Texas and Louisiana coast. The national refinery capacity was reduced by approximately 25%.
If on August 29th you had bought one future contract of RBOB (need approx. $6K for margin) and you would have been willing to risk around a $1,500 loss, you would have made $16,000 in 3 days*. That’s assuming… a perfect exit.
Indeed, weather markets or other special event such as geopolitical unrest in oil-rich countries, tend to provide big spikes in prices that you may be more lucky than good to catch. In hindsight, some may have caught the RBOB rally because there was already a head & shoulder bottom pattern that was forming (see the neckline drawn on the chart). However, more times than not, catching the rally or the breakdown is very difficult. Getting out at the right time is even more challenging.
Some of the best trades actually happen following the rally. If you know that the rally is event driven, you can expect a reversal shortly thereafter. In this case, it happened almost immediately, because after the initial 4-5 days scare, the reality to the fundamentals was going to go back to normal very quickly and prices would reflect that.
In the case of weather markets due to long-term events, such as a developing drought, you can expect a longer rally, even a month or two long, and an even longer trend back to the mean. This occurs because it takes longer to assess the damage and to return to a normal supply and demand scenario.
Bottom line: if you miss the spike, don’t worry, look for a good reversal entry.
* Trading RBOB for September delivery. A trade in the October delivery, would have required a $1,000 risk and could have generate a $10,000 return between August 11 and August 19. October delivery would also have provided the reversal opportunity with a potential return of around $7,000 in 3 days with a single contract.