Crude Oil's Failure Leads to a Profitable Opportunity / Commodities / Crude Oil

Crudeoil moved sharply higher yesterday, almost touching the previous August highs,but it didn’t manage to break above them. The resistance that we outlined inthe previous Oil Trading Alerts kept the rally in check, and we already see theresult. Crude oil simply declines. What’s next? How far can it decline?

Inshort, the previous outlook remains up-to-date, simply because the situationdeveloped in tune with what we wrote.

Ofcourse, a daily rally appears bullish at the first sight, especially for theinexperienced traders, but this is a false signal. To be clear, a daily rallyis not bearish on its own, but it’s not enough to make the situation bullisheither. Let’s keep in mind that price tops have to – by definition – happenafter a rally, not after a decline… So why is thesomething-rallied-so-it’s-going-to-rally-again way of thinking so popular? It’seasy to extrapolate the most recent trends into the future as that’s what makessense… Emotionally. And that’s exactly what makes this business hard in thelong run. One of the most difficult trading tips one needs to adhere to inorder to make money is that one usually needs to act against what seems soobvious at the first sight.

Thetruth is that a daily rally is just a piece of information that investors and traderscan use. And the way one uses it will determine if they will make money or not.How should one use it? As always, the context is the king. And what does theking tell us today?

Let’stake a closer look at the charts below for details.

Asfar as the daily chart is concerned, in yesterday’s Alert, we wrote the following:

Yesterday,crude oil tested the red resistance zone created by the previous peaks andfurther reinforced by the 61.8% Fibonacci retracement. While the bulls'unsuccessful break above it triggered a pullback, the commodity still closed the day abovethe Wednesday's green gap.

Earliertoday, we saw another test of the green gap - the unsuccessful attempt to movelower translated into a rebound. This suggests that we could see a retest of the redresistance zone later in the day.

That’sexactly what happened yesterday. We saw a retest and this retest failed. As youcan see, the price is declining today.

Let’szoom in a bit.

Asfar as the 4-hour chart is concerned, here’s what we wrote:
The red zone isreinforced by the upper border of the declining purple trend channel and theupper border of the rising green trend channel of the 4-hour chart. Theseresistances combined with the position of the 4-hour indicators suggest a highlikelihood of an upcoming reversal.
Where would the bearsaim to take black gold then?
(...) Should the bullsfail to push prices higher (or should we see an invalidation of a potentialbreakout above the upper border of the channel), the sellers will likely takethe reins. Then, crude oil futures can be expected to trade down to atleast the lower border of the formation or even to the lower border of thepurple declining trend channel and the recent lows.

That’sexactly what happened. The tiny breakout above both trading channels wasquickly invalidated, and price moved back into the purple trade channel,suggesting further declines.

Moreover,the sell signals generated by the 4-hours indicators suggest furtherdeterioration in the coming day(s). They serve as the confirmation of thealready-bearish case for crude oil.

Thetarget is created by the lower border of the purple trend channel and therecent lows.

Summing up, oil bulls haveonce again been stopped at the red resistance zone and the 61.8% Fibonacciretracement, and they invalidated small breakouts above the short-term tradechannels. This is a bearish combination that is further reinforced by sellsignals from the indicators on the 4-hour chart. Consequently, the shortposition remains justified from the risk to reward point of view.

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Nadia Simmons
Forex & Oil Trading Strategist
PrzemyslawRadomski
Founder, Editor-in-chief

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