Discovering the dangers in certain trends

In July 2008 when oil was trading near $146 a barrel many companies used futures and hedging contracts to lock-in prices near $146. A few weeks later oil started its plunge to the eventual low of $33. The collapse was a high probability outcome of the parabolic trend that started to develop in May 2007. This type of trend usually leads to a rapid collapse, although the eventual fall in oil was much lower than expected.

The same type of parabolic trend is found in the current gold chart. The fall from $1,200 to $1,055 was consistent with the type of collapse associated with a parabolic trend, although the gold price retreat has not been as dramatic as the retreat in oil during 2008.

Price activity is a reflection of human behavior. This behavior may be driven by objective and verifiable factors, such as the supply and demand balance for oil. However, the behavior is modified by a wide range of emotional factors. These are often classified broadly into fear and greed but this is an oversimplification. Behavior is complex, and behavior when money is involved is even more complex. Fortunately behavior shows repeated responses and these are revealed as repeated patterns of price behavior in the market.