Chart Of The Day: Oil Buyers Now Outweighing Sellers?

While stocks have been rising over the past few days on speculation the economy will weather the current Omicron outbreak of COVID, oil traders don't seem as convinced. The price of the energy commodity has been wavering over the past few days, fluctuating between positive and negative territory.

Yesterday, the Energy Information Administration reported a drawdown in crude oil inventories of 4.72 million barrels last week, almost double the median forecast. As a rule, when oil inventories drop more than expected, that's a bullish indicator. Indeed, it should be especially so when the larger than expected drawdown occurs amid concerns of lower demand due to a highly contagious strain of an ongoing pandemic-inducing virus.

So why has the price of oil been wobbling? Perhaps investors of the most sensitive asset to social restrictions are just by nature more cautious. Or maybe technicals are affecting market moves during a period of thin pre-holiday and lower year-end volumes.

Oil Daily

Oil found resistance at the highs going back to Nov. 29, indicated by the solid red line. Today was the eighth day that the price touched the Nov. 29 high of $72.93 a barrel and retreated, then at time of writing reversed yet again.

The price of WTI appears to have bottomed on Dec. 20 but still remained higher than the Dec. 2 low, forming a Descending Triangle, which is presumed bullish. That's because while sellers were not willing to up the ante, ready only to sell at the flat $73 price, buyers were encroaching on sellers' territory at the low of $66.04 on Dec. 20—overcoming the number of sellers at that level—which was significantly higher than the $62.43 low registered on Dec 2.

If the pattern completes, which requires an upside breakout with a penetration of the $73 level, it will attest to the pattern's ongoing dynamics of buyers outweighing sellers.

The Ascending Triangle's significance rises as the 100 DMA realigns with its top and the 200 DMA runs through it, demonstrating its importance as a technical vortex of market forces.

But that's not the full story. To get the bigger picture, we'll take a step back to look at the price action that led oil to where it is now.

Oil Weekly

We realize that the price action we discussed makes up the right side of a weekly H&S top. A reversal pattern on this time scale can have a much more substantial impact. Note the RSI is signaling a negative divergence between falling momentum with each price rise, supporting the argument for a top. However, the pattern is complete only upon a downside breakout when the price slips below the $60 milestone.

As with the daily chart, the 50 WMA signals the importance of this price action, as it has been supporting it over the past four weeks and has maintained integrity, having carried the price since November of last year.

On the weekly chart, the more significant conflict between supply and demand is apparent, as noted above more recently on the daily chart.

Trading Strategies

Conservative traders should wait for the weekly chart to resolve its conflict—either a downside breakout or a pattern blowout when the price makes new highs.

Moderate traders would wait for the daily triangle's upside breakout or the weekly H&S downside breakout.

Aggressive traders could short with a stop-loss above the horizontal resistance since Nov. 29, enjoying an attractive risk-reward ratio. Money management is critical. Here's a sample to showcase the basic requirements of a coherent plan:

Trade Sample – Contrarian Short Position

• Entry: $73
• Stop-Loss: $73.50
• Risk: $0.50
• Target: $70
• Reward: $3
• Risk-Reward Ratio: 1:6

Author's Note: Trading is not about being correct every time but rather about working with statistics to get on their side. You must learn to customize trade plans to incorporate your timing, budget and temperament, for consistent trading. However, until you do so, feel free to use our generic samples to practice, but don't expect profitability, just a good education. Happy trading!