Chart Of The Day: Trading Oil’s Potential H&S Bottom Reversal

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A trifecta of fundamental events is currently driving the price of oil higher:

  1. Category 4 Hurricane Florence, which, as of this writing, appears set to make landfall on the US’s southeast coast sometime Friday;
  2. Declining US oil inventories, at least according to yesterday’s API weekly report;
  3. And looming sanctions against Iran which are scheduled to begin in early November.

As a result, WTI crude catapulted higher on Tuesday by about 3.4 percent, the most for the commodity since its 3.5 percent gain on June 26. Has oil finally bottomed?

Oil Daily

Yesterday’s jump formed a potential right shoulder in an H&S bottom reversal. Note that the head reaffirmed the uptrend line since mid-November, which was “guarded” by the 200 DMA, demonstrating its technical importance.

The jump brought the price back above the 50 and 100 DMA. However, those benchmarks aren’t significant in this market dynamic, as prices have been trading sideways since July, trampling all over these MAs.

The most accurate ‘tell’ that another move higher is on the way would be penetration of the $71 level, which would complete the bottom pattern. This would signify that prices may be on the way to overcoming the $75 July peak.

Trading Strategies – Long Position Setup

Conservative traders should wait for a higher peak, to extend the uptrend above $75.

Moderate traders may rely on a 2 percent penetration of the $71 level, to avoid a bull trap. Another filter would be to wait for a closing basis.

Aggressive traders might be content with a 1 percent filter basis, preferably on a closing basis.

Trade Sample

  • Entry: $72.00
  • Stop-loss: $71
  • Risk: $1.00
  • Target: $75
  • Reward: $3
  • Risk-Reward Ratio: 1:3

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