A Look at the Busted Pattern and Rally in Crude Oil Apr 3

Apr 3, 2010: 12:41 PM CST

The big news last week – that you might have missed if you weren’t watching – was in the non-stop rally in Crude Oil after bouncing off support and breaking two potential price patterns with bearish overtones.

Let’s see the rally and the two broken patterns:

From a pure p rice standpoint – ignoring indicators – it looked like we could have been seeing a “Head and Shoulders” reversal pattern in price… but that was broken this week with a sharp rally to break above the head and ‘destroy’ the potential right shoulder that appeared to be forming.

While the head and shoulders pattern was a larger pattern, price was forming a “Rounded Reversal” or rounded arc formation that was comprising the Right Shoulder.  That mini-pattern was also broken with this week’s rally off support at $80 to the $85 level presently.

The chart shows the importance of the “Line in the Sand” concept and why it’s important.

The “Line in the Sand” between expecting further downside action and a completion of the Arc and Shoulder pattern was the $80.00 level, which was the confluence of the rising 50 day EMA and the lower Bollinger Band.

As it were, a doji reversal candle formed at this ‘last level’ of support and buyers stepped in aggressively, simultaneously creating a ‘short squeeze’ and a ‘busted pattern’ rally off the critical $80.00 support level.

Now, price is at a new recovery high (though we’re not seeing that yet in the respective USO ETF… but that’s a whole other story) and is threatening to continue in pure breakout mode above $85.00.

The week ahead will be very important in assessing where this market goes from here, and whether this was just a ‘bull trap’ breakout taking advantage of a low volume ‘holiday-style’ week for stock market investors.

In this week’s Inter-market Report for subscribers, I go into more detail on crude oil, highlighting upside targets to play for on a price continuation breakout, as well as the standard charting and opportunity spotting in gold (which also ‘busted’ a short-term head and shoulders pattern), 10-Year Notes (which were in focus the week before last), the US Dollar Index, and of course the S&P 500.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

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