3/26/2012 OIL #4

Light Sweet Crude Oil Future (/CL)

Since the last post, oil price has been stair stepping up and it looks like it is about to make a move again. From the weekly chart, oil price is on track toward the 52 weeks high @ $114.83, which is also the 3 years high. You can clearly see in the chart, the 1^st leg move started in October 2011 when oil price bounced on the 2012 range bottom @ $75.3. It then came into the consolidation period, highlighted in red, which found a top at $103.75 and broke out about a month ago when it crossed the top. Like I said in some other post, you normally expect the 3^rd leg having the same length as the 1^st; in this case, the 3^rd leg should take the oil price up to the target @ $124.22. However, up in the way, the 52 weeks/ 3years high @ $114.83 will be a heavy resistance level, you may find more sellers coming into the market as it moves closer to the 2012 range top @ $114.32. If the underlying uptrend is strong, I think the oil price will consolidate near the high for a few weeks and breakout again. Even if it doesn’t breakout, I don’t think the future price will experience an immediate drop like the wide range red bar it did in April 2011 given the fact that the economy is recovering and tension in the Middle East has not eased yet, oil consumption will continue to go up while supply is having some frustrations. Most likely, if the future price can’t go any higher, I expect it to stick around the 2012 range top @ $114.32 while investors and institutions accumulate their inventories for another break. If it, unfortunately, does retreat after reaching the high, look forward for a double top formation, which should take the oil price down to at least the consolidation bottom @ $95.1.

In the daily chart, I see a bull flag being formed. The downward channel, where oil price is currently bouncing within, is the flag body while those consecutive green bars to the left of the flag body is the flag pole. The flag is bullish plus there are some good support levels sitting underneath the flag body, I think this is a good long opportunity. Depending on next 2 days’ actions, try to get into your long position as close to the consolidation top @ $103.75 as possible. Risk level in this trade varies. You can either use the bottom bound of the flag body or the 50% fib retracement level @ $102.97 as risk. For the first one, you cut your loss when oil price breaks the bottom of the channel, but notices that as long as price still trades within the downward channel, your risk will move down along with the downtrend line and you will find your risk slowly getting farther away from your original entry. Your second option for risk level locates at the 50% fib retracement @ $102.97. If you take a closer look, you will find the 50 day moving average @ $103.25 is slightly above the 50% fib level. A break of the 50% fib level is also the break of the 50 day moving average; if this happens, I think the oil price will resume its’ range movement in the consolidation range @ $95.1 - $103.75. Target wise, because the bull flag pattern is actually the 1^st and 2^nd legs of a 1-2-3 move, so, to locate your target, you simply add the 1^st leg’s length to the bottom of the 2^nd leg. Assume, the bottom of the 2^nd leg move (the flag body) is at $103.75, the consolidation top:

Target = End of 1^st move – start of 1^st move + lowest point on the 2^nd leg

= $109.95 – $95.84 + $103.75

= $117.86

Same situation we have encountered in the weekly chart, the target is above the 52 weeks high @ $114.83. Try to get some of long position out before the breakout level to have some profit buffers the downside loss. Once the oil price is a confirm breakout, get most of your position out around the 2012 range top @ $114.32, hold on to a small amount and let it runs to the pattern target @ $117.86 or the weekly target @ $124.22. But remember don’t ever let a winning trade turn to a loser; if the breakout doesn’t hit the target levels and retreats, take your profit on the pullback and be ready to re-enter when price declines to your initial entry point.

In the hourly chart, you have a better picture of the flag body. In the lower section, when the flag body began to form, the volume was mostly at average until I see an increasing volume trend recently, this gives a signal of the oil price is about to make a move. If you want to trade this intraday, there is a narrower range play between the consolidation top @ $103.75 and the breakout level @ $110. You want to get long when the oil price comes down to the minor support @ $105.23 and sell at the minor resistance @ $108.72. Your risk is the 1^st pivot support @ 105.19, which is only $.04 cents away; if you don’t want to get shaken out, give it a $.20 - $.30 cents risk. Another thing I want to add is, since the underlying trend is on the upside, you only want to play this on the long side, do not attempt to short until there is a clear down signal.  

I hope this post offers you some insight, thank you for reading and please feel free to give me some feedback.