Traders should be looking to buy oil on a decline this week.
The price of the gooey black stuff peaked just above $92 per barrel in late September. It traded near $74 yesterday. That’s a 20% drop in about eight weeks.
The chart of oil looks ugly – which shouldn’t be a surprise given the recent decline.
But it’s setting up to form one of two patterns, both of which are bullish.
Take a look:
Thanks to the decline over the past few weeks, oil is now trading historically far below its 50-day moving average (the blue line on the chart).
WTIC rarely strays more than 8% below its 50-day MA before reversing back toward the line. Oil closed Friday about 10% below its 50-day MA.
So, we’re due for some sort of snap-back rally which could kick off in one of two ways.
If that rally starts from here, then oil will form a “higher low” on the chart. A move back above last week’s high near $78 will form a “higher high” and confirm a new rally phase for oil.
Traders can buy oil on a move back above $78 in anticipation of a continued rally toward its 50-day MA.
On the other hand, if oil declines this week and makes a “lower low” (below last week’s $73 low), all the technical momentum indicators at the bottom of the chart will likely form higher lows. That sort of “positive divergence” is often an early warning sign of an impending rally.
In this case, traders can buy oil on a move below $73 per barrel, as long as the technical indicators remain above last week’s lows.
Either way, oil is setting up to make an important bottom sometime this week – perhaps just ahead of the OPEC meeting on Thursday.
Buying oil and oil stocks into weakness looks like a low-risk/high-reward trade.
Best regards and good trading,
Jeff Clark
Source: Jeff Clark Trader