Light Sweet Crude Oil Future (/CL)
Hi guys, the oil future had a big rip last week, so I figure I should write an update on the recent move. First of all, I believe the recent moves were mostly speculations concerning the possibility of Iran closing the Strait of Hormuz, which will block the passage of about 35% of the seaborne oil shipments or 20% of oil traded worldwide. I think there is still room on the upside but it shouldn’t last long until the oil price begins to retrace because of buyers’ exhaustion.
In the daily chart, I throw in a Fib retracement study to find out how far did price retrace since it hit the 2011 high @ $114.83. If you remember the double bottom I mentioned in the last post, you can see the 2 valleys of the “W” pattern is sitting a little below the 78.6% retracement level @ $76.77 and bounced. I think this is Fib retracement study is a very good example for those who don’t understand what’s the purpose of the study. Every time, price caught a little bounce at each retracement level while it was moving down from the high. I usually use these retracement levels as reference gauges for supports and resistances. And you can also see the oil price had been ranging between the 38.2% Fib retracement level @ $95.51 and 23.6% Fib retracement level @ $102.29 for the past 6 months until the recent upside breakout.
For the breakout, I am looking at the price to retest the 2011 high @ $114.83, which is 4.5 points more on the upside. Because these are speculation moves, I don’t think there will be enough strength to break the 2011 high @ $114.83, so short selling the oil future before it reverses has a better chance to profit instead of chasing the trend and buying the heavy buy area. Furthermore, the breakout volumes on the last several bars were only about average or even less, indicating there weren’t a lot of buyers participating in this market, which lead me to think the move is largely attributed to speculation and there weren’t enough “real” investors involving in the oil market to back the continuation move. That’s why I think the move is not sustainable; and eventually when the move gets too over-extended, speculators will take their profit out of the market and oil price should experience a deep retracement to adjust its’ course of movement.
If you look at the second daily chart, I add two momentum studies, the Relative Strength Index (RSI) and the Slow Stochastic study, underneath the price chart to support my view. First, in the RSI study, index above 70 or below 30 is considered to be “overbought” and “oversold” respectively. Generally, when the index lands in either territory, it signals a potential reversal in the price movement; if the RSI is in the overbought area, stock price has a potential to move down, vice versa. Last year when oil price hit the high, the RSI reached its’ high @ 75.51 in the overbought area; soon after, price reversed and the RSI dropped back to the neutral zone. Now, the price hasn’t reached the 2011 high @ $114.83 yet but the RSI already made a new high @ 78.275, going deeper into the overbought zone, this gives me a signal of potential drop in the near future. Second, the slow stochastic study operates in a similar manner. The Oscillator above 80 or below 30 is indicated as “overbought” and “oversold” respectively. On top of this, there are the bullish and bearish divergence of the %K line (Green line) and %D line (Red Line) to indicate the set-up for future reversal (but I don’t see any divergence signal in the stochastic study as of right now so I can’t cover it in this post) . Recently, the oscillator reached the “overbought” zone and there is a resistance level @ 97 right above them, signaling a potential price reversal. Since both studies give an “overbought” indication and my chart drawings shows that price is about to encounter some heavy resistances, therefore I think betting on the downside is better than the upside
To trade this, I think short selling the oil future contract at the high @ $114.83 is the safest way to do since your risk will only be 1 or 1/2 a point, the only question is will the oil price goes back to the 2011 high or reverses before it reaches that level. In the second daily chart, oil price should be able to rise up to the 78.6% Fib extension level @ $111.43 considering oil price had a deep retracement of 78.6 % after hitting the high in 2011. If you sell short at $111.43, your risk will be the 2011 high @ $114.83 and look for any target between the previous range resistance level @ $103.38 and support level @ $95.1 from the first daily chart. I also have a 50-day moving averages (dark grey line) @ $100.34 sitting between the support and resistance level. If price retreats and reaches the 50 SMA before reaching the levels I mentioned above, you should cover at least 50% of your short position because the 50 SMA often provide good support for the price from falling unless the strength of the move is strong.
In the hourly chart, I put in a few more levels from last week’s moves. The resistance @ $110.46 comes from the consolidation when oil price was at this high last year and, at the same time, this is also the first resistance from the pivot point study, therefore, I think the oil price will congest here for several bars, or half a day. Noticing the second pivot resistance @ $111.17 is only $.3 away from the 78.6% Fib extension level @ $111.43, therefore I believe $111.43 is a good entry point to sell short if you don’t want to wait until price hit the 2011 high @ $114.83. However, you should remember the high is where your risk locates; you can average your position up to the risk level but you have to cover it if price rises another point from the 2011 high. Target wise, any of the underlying support levels will do depends on how long you want to stay in the trade and how much confidence you have in the short position. For me, I prefer to cover 50% of the short position at the 4th support level @ $107.96 and by the time oil price drops to the 4th support level, the 200-hour moving average (white line) should rise to somewhere between the 2nd and 4th support levels @ $105.58 - $107.96. Same as the 50 SMA I mentioned in the last paragraph, cover another 50% of the short position, which is 25% of the original position, when price reaches the rising 200 SMA and ride the rest down to the 1st support of $104.66.
I hope this post offers you some insight, thank you for reading and please feel free to give me some feedback.
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