Chart Of The Day: Why Oil’s Rally Could Be About To Reverse Course

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Even though the US sanctions against Iran are looming, with the November 4 deadline quickly approaching, we don’t expect this current rally in oil will extend much further. Indeed, we anticipate a downward correction, despite the much-vaunted as well as universally anticipated oil supply crunch.

It’s clear that OPEC’s output isn’t enough to compensate for the shortages generated by Iran’s already diminished sales of their supply, nor can Russia’s highest rate of production since the Soviet era overcome transportation constraints. Even though current output from the market’s major producers is unable to overcome a global supply shortage, on the technical chart the current uptick is showing signs of weakness.

Chart Of The Day: Why Oil's Rally Could Be About To Reverse Course

Oil Daily

After climbing over 5 percent during the two previous trading days, the price of crude oil is slipping. The retreat itself is not the issue, but its location on the chart lends credibility to a potential correction. It is now heading toward the $75 key level, the early July peak.

While it isn’t necessary to point to the potential for a double-top—complete with a downside penetration of the $64, the August-15 trough—the overbought RSI is pointing down. This increases the likelihood that prices have moved too fast.

The 50 DMA (green) seems to have found resistance below the 100 DMA (blue), which confirms the outlook that traders may be second-guessing the pace of this rally.

Trading Strategies

Conservative traders should wait for a reversal before considering a short position. They would go long, with a close above $76.

Moderate traders may even enter a long position upon a return move to $72.00, the H&S bottom neckline.

Aggressive traders may short with a stop-loss above $76, the round number above today’s high.

Sample: Conservative and Moderate Long Trades:

  • Entry: $72.00
  • Stop-loss: $71.00
  • Risk: $1.00
  • Target: $75.00, current resistance
  • Reward: $3.00
  • Risk-Reward Ratio: 1:3

Sample: Aggressive Short Trade:

  • Entry: $75.50,
  • Stop-loss: $76.00
  • Risk: $ 0.50
  • Target: $72.00
  • Reward: $2.50
  • Risk-Reward Ratio: 1:5

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