NYMEX crude oil futures trended nicely higher in the first half of the year and then suffered a rout starting the end of June. I don’t see any screaming evidence that the larger uptrend is over. And the recent decline has brought crude to a demand zone spanning 100-98.
After such a steep fall, I’d expect to see some rebuilding before the next sustained rally. Concretely, that means a period of churning or basing in which capitulation selling by long holders is absorbed by institutional investors quietly accumulating. Be flexible in your thinking when looking for a base to form.
Clean double bottoms and inverse head and shoulders bottoms don’t form as often as they used to because the process of control shifting from the sellers to the buyers happens much more quickly than it used to. What you’re looking for is any evidence of a a series of sell-offs failing to achieve or sustain lower prices, followed by a rally above the high point of the basing activity. Ideally, you want to see a relatively stable period in the price action accompanied by heavier volume, confirming capitulation selling and new buying, followed by a run higher.
Key Levels
The 100-98 demand zone is derived from 38.2% and 50.0% retracements of the uptrend from January to June. These are natural percentage retracements to occur before the next change of direction, based on the markets’ tendency toward proportional balance in uplegs and downlegs that accord with the Fibonacci sequence. As you can see on the chart, the 100-98 zone lines up with past areas of congestion and turning points that increase the likelihood of buying there.
Good trading, everyone.
