Open the Floodgates: When Price Stays High with Too Much Supply

It’s a common dilemma….when to exit a position in a stock or commodity in the midst of a strong uptrend.  With plenty of arguments about traders exiting too early (see Trend Following by Michael Covel for example), the decision to exit can be a tough one.

One possible sell indicator is an honest assessment of supply.  When price is rising, demand typically exceeds supply.  But sometimes supply is present.  Instead, there are a variety of intermediate problems that are blocking access to the supply.  When this is the circumstance, you might want to exit before the floodgates open and the supply is unleashed.

Say you were browsing the June 2, 2014 issue of Time magazine.1)Specifically pages 14-15 concerning transportation of shale oil You are aware that the price of oil has been strong recently, and has been setting new highs.  And here in Time, you encounter an article discussing the difficulties in transporting new shale oil to existing refineries.  A minimal number of existing pipelines run through the Bakken shale formation.  This is a perfect example of the above scenario.  Supply is present, but price is sustained because of an intermediate transportation issue.  Exit before the floodgates open!  Take a glance at a chart of oil prices.  You would have escaped before the start of a multi-year downtrend later that month…

References   [ + ]

1. Specifically pages 14-15 concerning transportation of shale oil