The price of Crude Oil has been sinking at a massive rate over the past half a year falling from $105 in July 2014 all the way down to below $50 this month.
From a technical point of view, it is not surprising that the break of the contracting triangle has been very impulsive. Technical traders know that the break of consolidation zones can spark speedy rallies and especially razor-sharp sell-offs.
From a fundamental point of view, the price decline is fueled by the lack of global economic growth and worries about the prospect of growth in the near future.
Of course the lower oil prices could help stimulate inflation or avoid serious deflation in parts of the world such as the E.U., which posted a CPI level of -0.2 on Wednesday.
The Fed released minutes of the FOMC’s meeting in December ’14 hinted that there was no rush in making quick decisions until clear signs of the US heading towards inflation targets. Several participants stated that “slower economic growth abroad to negatively affect the U.S. economy […] but the net effect of lower oil price on the U.S. economic activity to be positive.”
Let’s change our attention back to the charts.
OIL MONTLY CHART
Price is rapidly declining BUT price is also approaching a very strong support level: the bottom at $33.
This was the lowest price recorded during the financial crises of 2008-2009 and was the turning spot for a rally back up to $115.
Conclusion: although strong impulses can push further than traders expect a bullish bounce near or at the strong bottom of $33 is a setup worth monitoring.
HOW TO TRADE
Before I would even think of trading a reversal against the bearish momentum, I must see a clear bullish candle stick pattern on the monthly chart. Something similar in fact to the turn around that took place back in February 2009. Or the bearish candle stick pattern in July 2008 is another prime example.
A monthly candle stick pattern is THE signal for a trade setup. A trader can base the trade directly off of the signal OR decide to zoom into so as to lower the size of the stop loss.
For the moment though the daily chart (here above) is showing no signs of stopping and there could be some space for 1 or 2 smaller short trades until price gets too close to the monthly bottom.
- When it does approach the bottom, it is best advised to sit on the sidelines and wait for price to break or bounce.
- Until then, a temporary relief rally back up to the small consolidation zone at $55 could be an interesting zone for intra-month shorts.
What price action do you expect with oil?
Will you be looking for trade setups on it?
Thanks for sharing this post and wish you Happy Hunting!
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