re: Top Ten Trusted Timing Techniques - Tip 4 - Th
Given the recent debate about CUE, HDR etc valuations, here's a copy of a post I put up last November which is just a copy of a rip snorter of a post by pj from early 2001.
Tip 4 - Psychology of Oils
Just about everything a trader of speculative oil stocks really needs to know was contained in the following post from pj on 10/2/01:
"To all those interested in oil specs,
I had a request from Blackgold to repeat a post where, in discussing NWE, I referred to the market psychology of oil spec prices. This in turn was I think in response to a request by "Yak". I didn't keep a copy, so, for BG and Yak and anyone else interested I will try to rephrase the psycho bit.
First of all, with respect to market timing there are a few general rules, but remember this is the stock market - they are not hard and fast. Having said that, of all trading opportunities oil stocks seem to me to present a situation over which you at least have some control.
How a stock behaves will be influenced by the market's knowledge of the forward drilling program, the timing of the program, the potential upside in the event of success, the markets view on the likelihood of success, the price of oil, the overall strength of the market, the need for the company to raise capital by placement of shares, the publicity the stock receives, and the degree of emotive phraseology in the company's market announcements (which also may be related to the need to place capital).
How then, with all these different influences can you ever put it together and make money out of it? First probability is that if you hold the average oil spec long term (for years) you won't. You will have excitement and dreams of megasuccess, but also a lot of disappointments as the chance of success is low - just visit a chart of say Sun Resources over the years to demonstrate this. If you do, though, you will see a regular occurrence of many 50 -100% gain trading opportunities.
The trading opportunities referred to above arise from the fact that the price of an oil spec will nearly always rise in anticipation of the spudding of a well (I say "nearly always" -at times of low oil prices there have been instances of complete disinterest one way or the other).
Purely from the money making point of view therefore the key to success is to sell before or close to spud date and to buy back some time after the well fails (as it most likely will).
As I stated before this is dead easy until you are hit with a rare successful well and watch the stock you just sold skyrocket. In my case this caused a permanent psychological scar years ago when I sold Claremont petroleum for 13c at 100% profit only to see them rise to $1.70 in a day a few weeks later. Once injured one solution is the inevitable and weak"sell half". Still, you get to retain an interest and can often get a free ride.
How you time your trades will depend in part on your philosophy - whether you are looking for a quick day trade or, as with myself, more a part timer who tends to hold of periods of months. If the latter, although it can get drawn out with long periods of inactivity (time tables are subject to change), buying 4 - 6 months or more before a planned major well is almost certain to bring you success.
Be careful though not to buy the peak of a bullish run on a stock which is the result of an announcement of a strong forward program - wait for the market to settle, or better still buy a stock which is generally ignored but has the potential for such an announcement, or buy when the market settles following a farm out announcement. If there are multiple wells planned buy in the dips as the wells fail and sell before the next one spuds (or even if they are not planned - there is sure to be another one day).
The exact timing of the peak price before drilling begins varies from as much as 3 months (if a strong well publicised forward program is announced) to within the 3 week period before spud date. Much will depend on the state of the market at the time, the timing and emotive nature of announcements, and delays in spud date - the only certainty is that it will occur sometime before the well spuds.
Short delays in spud date seem to provide opportunities for traders, but it is difficult to be correctly informed. A stock sold down on delay is almost certain to rise again as the spud date firms, however much will depend on the nature and timing of the announcement. It never ceases to amaze me that sell downs occur on announcement or rumours of delay - as they subsequently only heighten the anticipation and provide a breathing space for further rises before the reality of the spud.
Peak prices are often generated by such picturesque anticipatory phrases as "the rig is on its way" or "the rig is onsite and preparing to spud". However an anouncement that the well has actually spudded and is at a depth of 250m is more likely to be greeted with a deathly lull in trading or a minor sell off.
This lull in trading generally continues during drilling until the moment of truth arrives (the target depth - some wells are a long drawn out affair with multiple targets). The only thing likely to increase the price at this stage is actually getting some sort of show - this happens occasionally but is no way guaranteed. When it does happen the market can get a bit hyped up and its usually best to sell (if you can bear it).
Therefore, if you purchase on spudding with the intention of selling before the target depth, the chances are you will be taking a loss. Fair enough though to purchase on spud if you wish to take a straight bet on the outcome of the well - but be prepared to lose half if the well fails. Some people choose to do this, and at least their money has not been tied up waiting for a possible well to happen - still, there you go, that's what makes the market.
Oh and what to do when the impossible happens and the well hits a pay zone - that's easy, its usually best to sell before the reality of development costs set in.
pj
ps For those who read my previous post which included an email to NWE, after resending it I did get a reply - no real additional info available, may post as an add on if I get time."
