≈ Diving deeply into the jungles of Brazil. ≈
Last week, Petroleo Brasileiro S.A. (NYSE: PBR) illustrated how extreme the world of financial markets can be. From the deepest of the deepest forests in the world, the almighty Anaconda showed its ugly face and gigantic body to investors.
There are no technical analysis skills that can survive a selling pressure like that. From its high on May 16th to the open on May 29th, a -35.8% drop.
You were bullish on the stock just by analyzing the chart. Textbook uptrend. You used ten indicators to support your bullishness. No insulin could bring down so much excitement: “The stock is bullish! Ten contracts, no stop. I have faith in my technical analysis.”
And then, a Black Swan event. The bull retracement turned into a major gap. Quicksand.
Petrobras CEO, Pedro Parente, cut and subsequently frozen the diesel prices for 15 days in an effort to halt truck drivers strike throughout Brazil. Obviously, it didn’t work. Brazilians, with their peculiar sense of humor, called last week the “Venezuela week”, as basic products were already lacking on the shelves. On the other side of the chessboard, we find politicians wanting to dinner Mr. Parente’s liver with some fava beans.
Did you see it coming? No way.
That’s the beauty of a Black Swan: no one sees it coming, but after it happens everything seems perfectly plausible and explicable (oh, those enlightened creatures…).
That is why we exhaustively preach that you have position sizing rules. Start from the tail: the point where everything can go against you because, well, it can. Shoot for convexity, asymmetric bets, favorable risk-reward ratios. Also remember: safe sex or no sex at all.
Welcome to Extremistan, the domain of extreme events.
Chart of the Day: Petroleo Brasileiro S.A. (NYSE: PBR) ≈ 8-month daily chart
The Black Swan pays a visit to Brazil taking PBR on a double-gap ride. Notice the selling pressure on the Volume indicator down below the chart. From its high on May 16th to the open on May 29th, a -35.8% drop.
