Chart Of The Day: How To Play Oil's Current Correction

WTI crude oil has been falling, for the second straight day in a row, for six of the last eight sessions.

On Friday alone, the energy commodity plunged nearly 7%—its biggest drop since April—part of the fallout after the US Federal Reserve's sharpest rate increase in 28 years. The more expensive dollar means that oil could become too costly given that it's priced in USD. Thus, the market quickly repriced the commodity according to the updated value of its underlying currency.

Aside from the influence the current US monetary policy has on the oil market, WTI is in a long-term uptrend. Indeed, that's expected to continue as long as supply concerns keep steering prices—a situation that will likely endure while Russia's war in Ukraine persists. Supply disruptions out of Libya could also trigger an additional up-leg.

But weekly technicals aren't reflecting fundamentals.

Oil Weekly

The price may have completed a weekly Evening Star, a three-candle bearish pattern exhibiting a reversal, as prices neared the March levels, which were the highest since 2008. Plus, the MACD completed a double top, while the RSI registered the second trough to establish a downtrend.

Still, though, oil remains in an uptrend. All these signals suggest is that the market is ready for a correction—though that may not necessarily happen.

Via the daily chart, the potential for a correction doesn't evaporate, but it does look more innocuous.

Oil Daily

Oil has been trading within a rising channel after the price completed a Symmetrical Triangle. The pattern's simplified target— measured by its height from the $103 point of breakout—is $127. However, freely traded assets do not move in straight lines. They move as sentiment shifts between fear and risk appetite, swinging from one extreme to the other.

Thus, we can surmise that the correction could occur, albeit within the uptrend. The price gapped down today, below the 50 DMA. At the same time, the Relative Strength Index, which measures momentum, and the Moving Average Convergence Divergence— which compares pricing via shorter and longer moving averages—both provided sell signals, having peaked and fallen below supports.

Nonetheless, based on the signals and recent activity, there appears to already be a correction in the works. As such, here's a narrower view to help calculate possible entry positioning.

Oil Hourly Chart

The price completed a pennant, a pause in the market after a 10% plunge in 7 out of 8 trading hours. A downside breakout would signal a resumption of the selloff, according to the flag formation.

Trading Strategies

Conservative traders should wait for the price to demonstrate support by basing out before entering a long position.

Moderate traders could wait for that evidence of accumulation and short a rally with a stop-loss that makes sense for their circumstances.

Aggressive traders would sell, given that the hourly flag has completed, upon a downside breakout, or buy if the flag blows out and traders force the price back above the range. You must have a tight trading plan. Here is a generic trading sequence:

Trade Sample 1 – Aggressive Short

• Entry: $108
• Stop-Loss: $109
• Risk: $1
• Target: $104
• Reward: $4
• Risk-Reward Ratio: 1:4

Trade Sample 2 – Aggressive Long

• Entry: $104 (if the price bounced and retested this level)
• Stop-Loss: $100
• Risk: $4
• Target : $124
• Reward: $20
• Risk-Reward Ratio: 1:5