March Crude Oil Structure Update and One of My Favorite Chart Patterns

Mar 1, 2013: 2:35 PM CST

As we did with the recent update on Gold’s structure and key levels, let’s take a look at the current progression and price structure that’s developing in Crude Oil.

As an educational bonus, we’ll review one of my favorite chart patterns that completed with a powerful outcome.

First, the Hourly Intraday Structure Chart of Crude Oil:

To recap, Market Structure refers to the progression of price swing highs and swing lows that define a trend in motion or else a consolidation phase in a market.

It’s the core of chart-based analysis and is inherently devoid of indicator clutter – it’s an assessment of price itself and the patterns the swings create (along with key levels along the way).

In terms of price levels, we see two clear zones that are operating in Crude Oil currently:

The $91.50/$92.00 level is the most recent pivot that failed to hold as support and price fell suddenly lower when price broke under this inflection zone (it had provided both support and resistance).

The other level is less important now, but was very important in terms of taking profits from the long-side and initiating new short-sale positions on the breakdown under the higher inflection level just under $96.00.

For planning purposes now, a failure here at the $90 ’round number’ inflection suggests that the short-term downtrend would likely continue to target the prior lows into or under $88.00 per barrel.

What does structure reveal about Crude Oil?

We can observe two short-term timeframe trend reversals in structure; the first reversal occurred at the green highlight as January 2013 began and the most recent structure/trend reversal occurred with the breakdown under $95.50/$95.

Structure has remained in a violent downtrend since the official inflection/reversal (and again continues to ‘trend’ its way toward the $88 level).

Let’s look at the reversal and highlight one of my favorite price patterns/progressions for reference:

The focal point will be the “Rounded Reversal” or “Arc Trendline” pattern that developed from mid-January to the recent breakdown which was marked by persistent negative divergences into the $97.50/$98.00 higher timeframe target.

One of my favorite patterns is a lower timeframe “Arc” or “Rounded Reversal” pattern that exhibits negative divergences into a known higher timeframe inflection point (the logic would be true with any two timeframes, not just Daily and Hourly interplay).

There’s never a guarantee that any resistance level will hold price back but lower frame divergences in the context of an extended structural rally do tend to increase the odds of failure at a resistance level.

In addition to the negative momentum divergences, wee see a sharp downside spike to new lows in momentum on the February 15 sell swing which I like to call a “Kick-Off” (it’s based on a “Sign of Weakness” as explained by Richard Wyckoff).

A simple formula to remember is that the following sequential factors tend to increase the probability of a structural reversal:

Extended Rally + Higher Timeframe Resistance + Lengthy Negative Divergences + Kick-off/Spike Signal in Momentum

No reversal is ever guaranteed so be sure to honor stop-losses in the event the trend resumes and price does ‘unexpectedly’ break above the logical resistance zone.

An unexpected breakthrough of a logical resistance level does tend to generate a flood of buy-orders in to the market, both from buyers entering new “breakout” positions and sellers exiting old short-sell trades as price breaks above the resistance pivot.

We can see this behavior occurring on the firm breakout above resistance as we turned the corner into 2013.

Keep studying these patterns and market structure charts (simple price swing high/low progressions) as you add your own analysis to the market.

This is the kind of weekly analysis (without the educational lessons) which I detail in each week’s Intermarket Report to members.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

Corey’s new book The Complete Trading Course (Wiley Finance) is now available!

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