Divergences and Three Push Pattern Reversal in Crude Oil

May 5, 2011: 2:18 PM CST

Traders are still adjusting to the significant sell-offs this week in the commodity markets, including Crude Oil which broke sharply today.

Let’s see the daily chart pattern leading to the sell-off and see a great reference example of the “Three Push” reversal pattern with “Triple Swing” Negative Divergences.

Crude Oil Futures (@CL) Daily:

First of all, these surprise moves tend to be frustrating to both sides – bears and bulls.

Bulls – obviously – because if they remained long through the sell-off, they are losing open profits or money (if on a short-term trade established from higher levels).

Bears – not so obviously – because if they weren’t already positioned, or positioned on the breakdown under the 20 or 50 day EMAs, it can be very difficult to put on a position because the think “Well, the moment I get short is the moment oil will reverse, given it’s down so much already.”

While nothing can predict the future 100% (including fundamentals), charts often provide subtle – or even not-so-subtle – clues about the future immediate direction (or likely swing) of price.

In this example, we had two major variables flashing a big “Caution” Sign in Crude Oil:

1.  Lengthy Negative Momentum Divergence

2.  “Three Push” Reversal Price Pattern

All else aside, I wanted to focus on these concepts.

Generally, a divergence is a simple “caution” signal, while a “Multi-swing” divergence is not only a strongly warning sign, but a potential “Expect a Reversal” sign.

The stronger/longer the divergence, the bigger the resolution in price once the divergence ‘kicks in.’

Beyond the negative momentum divergence, we had a classic (one of my favorites) “Three Push” Reversal Pattern that goes by many names:  “Three Drives to a Top,” “Three Little Indians,” etc.

The logic is the same – after three roughly symmetrical “pushes” or swings to marginal (small) new price highs, and failure of buyers to push the market significantly higher, a reversal can develop as the buyers “stop pushing” price higher.

Beyond the divergence and pattern, we look to rising moving averages as guides for confirmation of the potential reversal in play.

As long as price stays above (continues to bounce-up off of) the rising 20 day EMA (green), all is well and the bearish signals are just caution signs.

However, a price breakdown under the 20 EMA allows for a ‘scalp’ play to test the rising 50 day EMA, and any movement under the 50 EMA tends to “lock-in” or trigger the reversal bias (or at a minimum, the expectation for a much deeper retracement than we’ve seen in the prior down-swings).

In this way, concepts give way to trade entries at triggers, with the concepts being the divergences and “Three Push” pattern and the triggers being the breakdowns of rising EMAs or rising trendlines.

Of course, you can drop to a lower timeframe structure for better entries/stop-loss parameters based on the daily chart structure.

Anyway, while the down-move was volatile, the pathway ahead of the sharp sell-off was paved with divergences, a major bearish reversal pattern, and the 20 EMA breakdown ahead of today’s sharp move.

Corey Rosenbloom, CMT
Afraid to Trade.com

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5 Comments

5 Responses to “Divergences and Three Push Pattern Reversal in Crude Oil”

  1. Terlyn12001 Says:

    That was a really excellent analysis the other day on this…yes, it's hard to jump in and know where the daily target might be, especially when there are several different bid ask prices on the one minute chart!

  2. Bhupesh Says:

    Hi Corey – I am your follower from India. I have read your analysis on Nifty50 and Silver and they are fantastic.. I would like to have your analysis on one very specific Indian Share Suzlon Energy which trades in Nifty. It seem to be bottomed aftr lon lon downfall but I would like to have you expert advice. Please advise.

  3. takloo Says:

    classic exhaustion pattern… is there anyway to reasonably forecast the size and length of the reversal?

  4. Corey Rosenbloom, CMT Says:

    That's a great question – in my experience, technical analysis (like this) is great at forecasting direction and probable moves, but doesn't do as well at the projection or magnitude of those moves (especially moves that erupt into panic selling/feedback loops).

    Advanced Cycles, Gann, Elliott Wave, Fibonacci all have a role in trying to forecast time and price of moves, but even then, I've seen markets blow right on through well-researched levels, so I'm of the mindset that direction is far easier to call out than magnitude – which means trailing stops and holding on until we see trendline breaks, divergences, or reversal signals rather than necessarily exiting at a predetermined target that a market might blow right through, leaving money on the table.

  5. Corey Rosenbloom, CMT Says:

    That's true!

    Trading these moves on the intraday charts has been a hair-raising experience, to say the least. The rules of a market in break-away mode is to get the trade on, likely with a smaller position size due to the volatility, and not rely on perfection in execution tactics which might cause us to miss a quick entry.