Next Points for Crude Oil Bears / Commodities / Crude Oil

Thanks to yesterday’s session crudeoil lost 3% and approached the previously-broken barrier of $70. In this areaoil bears met several other short-term supports, but are they stable enough tostop the sellers in the coming days?

Let’s take a look at the chartsbelow (charts courtesy of http://stockcharts.com).

Long-termPerspective – Invalidations!

In our last Oil Trading Alert, wewrote that (…) the commodity approachedthe upper border of the red zone, which suggests that we can see aninvalidation of the earlier breakout above the it in the coming days (…).

As you see on the monthly chart thesituation developed in tune with our assumptions and crude oil closedyesterday’s session not only below the upper line of the above-mentioned zone,but also under the previously broken 38.2% Fibonacci retracement based on the entire 2008-2016 downward move.

In this way, the commodityinvalidated the earlier breakouts, which doesn’t bode well for oil bulls –especially when we factor in the current position of the long-term indicators(the Stochastic Oscillator generated the sell signal after several months ofbearish divergences and the CCI is very close to doing the same – in this casewe could also observe a deepening bearish divergence).

Medium-termChart and the Pattern

Are there any other negativetechnical developments? Let’s zoom in a bit our picture and examine the weeklychart. What can we infer from it?

The first thing that caught our eyeson the medium-term chart was an invalidation of the earlier breakout above theupper line of the blue consolidation. Thanks to yesterday’s decline (which made our short positions even moreprofitable) the bears' chances for creating a pro-decline candlestickformation (the evening star) significantly increased.

What exactly does the formation looklike and what does it mean?

Let's start with the fact that thestars are one of the strongest signals generated by Japanese candles. The evening star is composed of threecandles and we marked the potential formation with a red rectangle.

The first of them represents astrong move consistent with the prevailing trend. The second candle has a smallbody, but sometimes it may also look like the doji, which makes the formationeven stronger. At this point it is worth mentioning that the length of theshadows in the case of the evening star is not so important, however, when themiddle candle has an elongated upper shadow (just as in our case) the signal isclearer. Then the market gives confirmation, forming of a long candle in theopposite direction to the current trend (just like during this week).

In stars, the price gap between thefirst and the second candle is important. In our case, it has only a few cents(free space between the closing price of the previous candle and the openingprice of the next candle), however, taking into account the size of the redcandle created earlier this week the implications are negative.

Nevertheless, they will be even morebearish if black gold closes the week at (or even better below) the first whitecandle low of $71.14. In other words, it will be enough if the bears maintainyesterday's closing price.

Will it happen? Looking at thecurrent position of the weekly indicators, we thin that thepro-declining scenario remains in the cards. Why? First, the CCI generated asell signal. Second, there are clearly visible negative divergences between the RSI, the StochasticOscillator and the price of the commodity. As you see on the above chart, asimilar situation in the Stochastic Oscillator took place when the May and Julypeaks were formed. Back then, bearish divergences preceded a bigger move to thedownside, which resulted in a test of the lower border of the blue rising trendchannel. Therefore, if the history repeats itself once again, we can seefurther deterioration in the coming week(s).

CrudeOil from the Short-term Perspective

Is there anything in the short term thatcan thwart oil bears’ plans?

Before we answer this question,let's recall the quotes from yesterday's alert:

(…)taking into account the above-mentioned long-term picture of light crude, thesell signals generated by the daily indicators and yesterday’s volume (it wasbigger than day earlier during Tuesday’s rebound), we think that furtherdeterioration is just around the corner.

Howlow can the price of crude oil go in the coming days?

Inour opinion, if the bears manage to extend Wednesday decline, we’ll see a dropto the next support area (marked with thepurple ellipse) in the following days. At this point it is worth noting thatthis area is created by the upper line of the black dotted triangle, the 50%Fibonacci retracement and the lower border of the green rising trend channel.Therefore, if it is broken the way to lower levels will be open.

On the daily chart, we see that oilbears realized the above-mentioned plan very quickly (only one session wasenough to reach the next target), which confirms their strength – especiallywhen we factor in yesterday’s volume (it was the biggestvolume since September 21, which shows the commitment of the sellers).

Nevertheless, we should keep in mindthat the mentioned zone is based on strong supports, which can result in arebound later in the day (at the moment of writing this alert the crude oilfutures moved to $71.50).

On the other hand, the sell signalsgenerated by the daily, weekly and even monthly indicators and all describedtechnical factors remain in the cards, supporting oil bears in further battlefor lower prices of black gold. Therefore, we will probably see lower prices in the following weeks, but a quickrebound here appears quite likely as well.

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Thankyou.

Paul Rejczak
Stock Trading Strategist
StockTrading Alerts
SunshineProfits.com

Stock market strategist, who has been known for quality of his technicaland fundamental analysis since the late nineties. He is interested inforecasting market behavior based on both traditional and innovative methods oftechnical analysis. Paul has made his name by developing mechanical tradingsystems. Paul is the author of Sunshine Profits’ premium servicefor stock traders: StockTrading Alerts.

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