Analysis

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USOIL
Jul 19, 2021, 9:44 AM GMT
#Commodities

Opportunities for Both Bulls and Bears on Crude

The price of crude oil has been depreciating over the past few weeks as global energy demand subsided a little bit. This process was bolstered following the last FED meeting.

Even though the current underlying sentiment is prevailingly bearish, it is unlikely for crude oil to develop a major bearish trend. Instead, the price of the commodity is likely to consolidate around the next Fibonacci support before the broader rally can be resumed.

With the beginning of the new earnings season in the U.S., selling pressure in the commodity market is likely to ease as investors and traders turn their attention to stocks. This is likely to positively impact the price of crude oil over the next several weeks.

Overall, the price action is likely to transition from the recent bearish correction into a new bullish uptrend over the near future, which entails trading opportunities for bulls and bears alike.

How Low Can the Correction Go?

The price of crude oil has recently broken down below the lower boundary of the regression channel, as shown on the daily chart below. This is demonstrative of strong bearish pressure in the short term. The breakdown came after a failed initial test of the 23.6 per cent Fibonacci retracement level at 72.30, followed by a pullback to the channel's middle line.

The next level where the price is most likely to find support is the 38.2 per cent Fibonacci at 69.44. If, however, the latter does not hold the correction, the downswing can be extended as low as the 61.8 per cent Fibonacci at 64.83. It remains to be seen whether enough selling pressure would be accumulated for such a turn of events.

Notice that the regression channel underpins a broad 1-5 impulse wave pattern, as postulated by the Elliott Wave Theory. Moreover, each impulse and retracement leg is comprised of smaller Elliott structures. Since the most recent impulse leg (2-3) appears to have peaked near the channel's upper boundary, the price action is currently establishing the next retracement leg (3-4).

If this holds true, it will substantiate the aforementioned expectations that the current bearish correction needs to bottom out before the broader uptrend can be resumed. That is why the correction appears most likely to bottom out at the 38.2 per cent Fibonacci.

This entails trading opportunities for bears in the short term, whereas bulls can look for a chance to utilise trend continuation strategies in the longer term.

The price of WTI broke down below a regression channel as selling pressure in the short term increases for the commodity

Notice that the ADX indicator has been threading below the 30-point mark since the 9th of April. A reading below 25 points means that the market is ranging, whereas a reading above 25 points that it is trending. Hence, the current sentiment represents a very weak uptrend, which is why a bearish correction is presently unfolding.

However, the Stochastic RSI indicator is currently in its oversold extreme, which means that buying pressure will likely resume increasing shortly. This is inlined with the expectations for a rebound near the 38.2 per cent Fibonacci.

Waiting for the Eventual Rebound

When examined on a smaller timescale, the underlying correction appears to be taking the form of a Descending Wedge pattern. The price action has probed the upper boundary of the pattern on two occasions. It is currently testing its lower limit for the third time.

Unless the price action breaks down below it immediately, it will probably probe the upper boundary of the Wedge one last time. This is likely to take the form of a pullback to the 23.6 per cent Fibonacci from below.

For the time being, the underlying momentum in the short term remains mostly bearish, though the selling pressure is evidently waning. This is demonstrated by the rising histogram of the MACD indicator.

Bulls should consider going long only on the condition that the price action consolidates above the 38.2 per cent Fibonacci or when it breaks out above the bottleneck of the Wedge.

The price action of Crude oil is developing a descending wedge pattern on the 4h chart

Notice that there was a massive Bearish Marabozu candle just now, which underpins an attempt at continued price depreciation. The MACD indicator picked up this upsurge in bearish momentum on the hourly chart below.

The price action is currently very close to the 38.2 per cent Fibonacci, after having reversed itself from the 50-day MA (in green). This newest behaviour of the price action should be taken under careful consideration by both bulls and bears.

It should also be stated that the 38.2 per cent Fibonacci is positioned very close to the psychologically significant level at 70.00, which is a prominent turning point. This does not preclude the possibility of temporary adverse fluctuations below the Fibonacci support, which also bears psychological importance.

The price of crude oil is currently consolidating around a Fibonacci retracement level before a bullish rebound can occur

Concluding Remarks:

As regards the current trading opportunities for bulls, they should consider going long ONLY if the price action consolidates above the 38.2 per cent Fibonacci over the next several hours. There is a very high probability of false dropdowns below 69.44, which is why bulls should not rush to buy into the market right away.

Once they go long, they should place tight stop-loss orders just below the 38.2 per cent Fibonacci. Since they'd be trading on the expectations for another bullish rebound, they might have to place several orders before they get the desired entry. They shouldn't instead move their SLs down.

As regards the current opportunities for bears, they shouldn't rush to sell either. Joining the correction so late into its development would entail the risk of sudden bullish rebounds. Instead, bears can potentially enter short near the 23.6 per cent Fibonacci retracement level at 72.30 if there are indications that the eventual bullish rebound is incapable of breaking above this barrier.

Additionally, bears could potentially enter short if the price action manages to break down below the 38.2 per cent Fibonacci decisively. They could do so once the price action establishes a throwback to this level from below (following such a breakdown).

Follow-up 1
/ Jul 28

A Confluence of Bearish Indications on the Price of Crude Oil

The price of crude oil recovered by more than $7 over the last several days, following a substantial bearish correction. However, the pullback seems to be running out of steam as the price action looks incapable of breaking out above the psychologically significant 61.8 per cent Fibonacci retracement level at 72.37.

There seems to be a confluence of mounting bearish indications, all pointing to a very likely reversal from said resistance. This entails an excellent opportunity for bears to utilise contrarian trading strategies.

With the ongoing earnings season in the U.S., traders and investors' attention is primed on the stock market, which is exerting extra selling pressure on commodities and energy. Even still, Thursday's GDP data in the U.S. could underpin the accumulation of global demand, potentially offsetting the fallout.

There seems to be a confluence of bearish indications on the price of crude oil, all poitning to a very probable reversal

There are several key reasons to expect a bearish reversal in the near future, as shown on the 4H chart above. As stated earlier, the price action is currently consolidating below 72.37, which represents the last major Fibonacci retracement threshold.

This happens just as the descending trend line (in black) crosses this resistance. The price action has already reversed from it on two separate occasions. This is why yet another reversal seems highly probable.

Additionally, the price action is also testing the 100-day MA (in blue) and the 150-day MA (in orange) presently. Both moving averages serve as floating resistances, which adds to the significance of the 72.37 level as a turning point.

Finally, the peak of the pullback appears to be taking the form of an Ascending Wedge, which, when found at the top of a recent upswing, typically signifies a probable reversal. In other words, the emergence of an Ascending Wedge just below the 61.8 per cent Fibonacci and the descending trend line is indicative of waning bullish pressure.

Despite this major confluence of bearish indications, traders should keep in mind that contrarian trading strategies involve a higher degree of risk compared to trend continuation strategies.

That is why they should place tight stop losses, not much higher than the 150-day MA. The first target for the correction is underpinned by the 38.2 per cent Fibonacci retracement level at 69.55. Once the price comes close to it, bears could substitute their fixed stop orders for floating TPs. The second target can be found at the 23.6 per cent Fibonacci at 67.81.

Bears should also take into consideration the fact that the 50-day MA (in green) is currently converging with the psychologically significant support level at 70.00, which is where a bullish rebound could occur. This possibility is made even more likely by the fact that the MA coincides with the lower end of the Distribution area (in red).

Profit & Loss
Short Term Long Term Net % Gains
+ - + -
0 0 0
1.10 USD
-1.56%
Short Term
+ -
0 0
Long Term
+ -
0
1.10 USD
Net % Gains
-1.56%
Journal Entries
Jul 25 - Entry 1
The price of crude oil consolidated back above $70 per barrel following a bullish rebound from the 61.8% Fibonacci retracement level
  • Even though our last analysis of crude oil failed to garner any profits, it succeeded in more ways than it failed. Chiefly, it explicitly warned against going long around the 38.2 per cent Fibonacci retracement level at 69.44 without sufficient evidence for a price consolidation there.
  • However, the analysis failed to account for the eventual rebound just above the 61.8 per cent Fibonacci retracement - the last critical turning point - which could have been used as an opportunity buy into the market at a discount.
  • At any rate, traders should feel depressed about missing out on an opportunity, which they've forecasted successfully. It is better to stick to your trading strategy and not join the market when the conditions are not right rather than join the market at an unfavourable level.
  • Then, being correct about the general direction of the market would be of no use.
Jul 29 - Entry 2
Our last trading analysis of crude oil was not successfull as the price action broke out above the Wedge pattern and the  61.8% Fibonacci retracement level
  • The expectations of our last analysis of crude oil were not realised. The price did not reverse from the upper boundary of the Wedge pattern and instead broke out above the 61.8 per cent Fibonacci retracement level at 72.37.
  • That is why it is so vitally important to place narrow stop-losses above such psychologically important price levels. Traders should not get frustrated as they are bound to make mistakes every once in a while.

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