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Oil: The Technical Perspective


Oil: The Technical Perspective


Ask any trader what their thesis on oil was 2 weeks ago, and they would tell you the markets are headed for new-lows. Ask that same question now, and you’ll get a room full of screaming looneys arguing about whether the breaking of 5 cent resistance band on oil charts is the beginning of the bull market.

In all seriousness, oil is a mess, and the market makers are aware. With the algos pulled away from commodities into the big-boy arenas of index futures (ES mainly), exchanges have put all-time low margins on CL (oil) futures to encourage traders to fill the market. Even with this capitalist incentive, market-warriors remain wary.

But our analysis does not concern the margins of CL. It concerns the technical direction of oil. To build our thesis, we need our context:

This is the daily chart of CL_NOV’17. Ignore the absence of volume pre-September 2015, as the contract was not being traded then. Our first job is to create our market direction: CL had been in a strong technical downtrend, characterized by two upper-trend lines with different magnitude. Pre-September 2015, the downtrend was strong, and the downtrend action levelled off into a rather long period of consolidation, with an ultra-support area near the $40 level. In 2017 the range got even tighter, refusing to break below the support-band, and refusing to break above resistance. The narrative deepens: in August 2017, the upper-trend line gets tested, and traders lock in their short positions. The short revamping of the downtrend fails, reversing at the $46 support-level.

That brings us here, into this point in time, which I can appropriately refer to only as no man’s land. We are faced with a tough crossroad that does not allow us to form a clear thesis: our upper trend line is broken, but we have not hovered above this line long enough to form a clear idea, and labelling it bullish would be amateur. To add to this, we have not broken the imposing upper-levels of the consolidation – $53, $55.75, and $59.70 – to have a clear direction if this market.

On the other hand, we must keep in mind an important principle in trading: the trend is most likely to continue it its previous direction than to reverse. Here we can add logical bias to our thesis, which is entirely different from emotional bias, by stating that the price is more likely to reverse at the next resistance level of $53 than to break through. If price does reverse, it would be necessary to see a move below the previous pivot of $46, as a signal of a continuation of the downtrend.

The uptrend thesis can also be sketched out, if price does not branch out as described above. First we want to see breaking of resistance levels of $53, $55.75, and $59.70, and then we want price to hold above $60. Considering the range of >$60 has not been tested in a little under 2 years, we can expect price to move slow and steady through this area, gaining momentum as buyers flock back into oil.

As is seen, there is no clear thesis on oil at the moment. As traders, we must accept that we will not always have a clear sense of a market, and must use time as a tool to build our thesis. What we can rest assured in is the following: a trend will come eventually, and with this trend, wealth will be created. So we wait, and watch, and hope, that soon, price picks up natural momentum, free of flash-event and front-page story price moves, and with this newfound momentum, we create a trade worthy of lining our pockets with.

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Writer: Shayan Salesi

Disclaimer: All investing can potentially be risky. Investing or borrowing can lead into financial losses. All content on Bay Street Blog are solely for educational purposes. All other information are obtained from credible and authoritative references. Bay Street Blog is not responsible for any financial losses from the information provided. When investing or borrowing, always consult with an industry professional.

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