It's Time For A Technical Oil Trade

Regular readers will know, as will anyone that has ever attended one of my instructional courses, that I very rarely arrive at a trade idea just by looking at a chart. Rather, I prefer to arrive at an idea in a “top down” style, starting with a big picture view of the global economy, then deciding which energy commodity or stocks will be most impacted. Only then do I look at charts, to find things that are poised to break out of a pattern and to find logical exit points for the position I am looking to put on.

Sometimes, though, even a market that is really about fundamentals is in balance, and then technical levels and patterns take on much greater importance. That is the case right now with crude. A look at the chart for WTI futures (CL) below shows a narrowing wedge, which indicates the kind of balance I am talking about, but a simple Elliott Wave analysis suggests that the next move of a couple of dollars or so in price will be quite significant.

There are two ways of looking at the waves marked by the gold arrows.

The first is that we are just entering wave three of a large bearish pattern. If that is the case, then we can expect oil to head significantly lower over the next few weeks as that wave develops and crude drops below the channel support at around $72. If, on the other hand, you treat the first gold arrow as just a range-setting move, then we are currently in the second, correctional wave of a new bullish pattern. If that is the case, then we will turn higher again soon and break through the resistance at around $82.

The levels to watch are marked by the white horizontal lines added to the second view of the chart, at $80.62, the high from February 13^th, and $76.52, the low from February 9^th.

A break of either of those levels will prompt me to trade with the momentum, short on a break of the support or long should we move above the resistance. Those levels will decide if we are in a bearish or bullish pattern, but until then, any directional trade would be the result of just guesswork.

This is a trade signal and style that is almost the opposite of what I usually prefer in several ways. Not only do I rarely trade base a trade solely on the chart as I mentioned, but I also tend to favor a contrarian style over momentum. This, though, is different.

Crude is stuck in a rut for a reason. Supply is still quite tight given OPEC policy and the continued Russian war in Ukraine, but seems to be in balance with current demand. However, there are questions about maintaining the current level of demand for oil. Central banks around the world are trying to slow growth to combat inflation, but there is always a danger that they will be too successful in that and will force major economies, and therefore the world, into a painful recession. So, the next fundamental move will be dictated by something that nobody has yet been able to figure out, how much pain developed economies will be able to bear.

So, the market is waiting for a signal from itself as to where the next big move will take us, and when enough people are focused on a level, or two in this case, a break of it can cause a quite sharp follow-on move. That could come in either direction here, and which direction it is will probably depend on traders’ opinions formed on economic data. I don’t want to guess whether that will be positive or negative at this point, so I am content to sit on my hands and wait for a move either above $80.62 or below $76.52 before joining in, then just going with the flow.