Yesterday was a textbook example of the trading phenomenon known as “buy the rumour; sell the fact”. Oil cartel OPEC did what was widely expected, extending production cuts by another 9 months to support oil prices in the face of rising US production. However, oil prices sold-off 6%, erasing some of their recent 17% bounce. Some disappointed traders were hoping for a 12 month extension. Others were holding out for deeper production cuts to make more of an impact on global output than the most recent 6-month effort.

If anything the simple 9-month extension begs questions about OPEC’s exit strategy and what will happen next March when yesterday’s updated cut agreement expires. What is OPEC’s long-term strategy for combating rising US production and a prolonged global supply glut, to get prices back above $60 and revive struggling oil-reliant nations? Rollovers ad infinitum? Or abandon it all and everyone go back to pumping and selling as much as possible, merely worsening the glut?

Having pointed to potential for such a price reaction only yesterday morning, below we look at how you can recognise and profit from this valuable lesson when trading shares?

Our first warning sign of a potential reversal and correction was oil prices having rallied by over +17% from early May lows.

The second was OPEC members singing from the same hymn sheet (especially Iran and Iraq, last year’s troublemakers) meaning potential for a surprisingly bullish announcement was already low. Last year in the run-up to the initial production cut agreement, every oil minister and his dog was chatting to the media at every available opportunity, their quoted commentary (both optimistic and pessimistic) resulting in erratic oil price swings that frustrated financial markets for months not knowing what would be agreed. Not so this time.

Third was the early wobble in prices yesterday morning, when the Saudi Oil Minister said OPEC “consensus was that deeper cuts were not needed” and Kuwait said 12-months was not an option. Given that oil prices had initially rallied on hopes for a simple six-month extension, and more recently on hopes of six becoming nine, taking the possibility of deeper cuts and 12-months off the table removed much of any potential there was for an upside surprise that would help oil embark on another leg higher.

Fourth was the aforementioned wobble producing a bearish double-top pattern that took oil prices from their highs of $54.8 quickly back to $53, erasing all the gains since last Friday morning.

Such situations are equally prevalent within equities, where shares have rallied strongly ahead of quarterly results or a  pending trading statement. Unless the official announcement and outlook (this is often the most important) is even better than the sum of all the bullish expectations out in the market, it can often be difficult to justify another up-leg for the shares. When everyone thinks that’s the top and they all want to get out, the sell-off can be brutal.

And this applies equally well in reverse. If shares have sold off strongly on expectations of a poor financial or trading update, unless the subsequent report (and outlook) is even worse, further downside can be limited. Bargain hunters step in. If the shares have been heavily shorted, a short-squeeze can ensue, seeing the shares rally even harder.

If you want to keep abreast of opportunities where there is potential to “sell (or buy) the fact” after a strong share price move get permanent access to our research. Complement this with our excellent trading service for tailored market updates and you’ll understand why we were recently voted Best CFD Research Service and have retained the Best CFD Provider title for nine straight years.

Enjoy your long and sunny weekend,

Mike van Dulken, Head of Research, 26 May 2017