Who would have expected such a headline on Crude Oil just five or so months ago?!  Today, it happened, with Crude oil trading just above $68 per barrel in the morning session on Wednesday.  Let’s look at the weekly and daily charts to see how this happened and what might be in store.

Crude Oil Weekly:

Note – the chart for Crude Oil – $WTIC – in StockCharts updates with end-of-day data, so it’s not showing the current sub-$70 prices yet.

Crude oil peaked just shy of $150 per barrel in July before falling over 50% to their current level in late-October.  Price cut all levels of support, both from Fibonacci retracements and moving average support with only a minimal retracement to the upside (on its sharp pathway down).  Price has also formed a new momentum low (“NML” on the chart) which is often a precursor to lower prices yet to come (following a retracement up).

Price is now testing the rising 200 week moving average, which is expected to provide support to prices, but it appears – at the time of this writing – that even that level is not holding price in check.  There are reports that OPEC will meet to cut production (reduce supply) which is expected also to give a boost to prices, or at least stave off some of the rampant selling in the commodity.

Common perception is that crude oil is falling due to “Demand Destruction” associated with a global impending recession, where companies will be downsizing/closing, retail sales will decline, and thus transportation costs (needs) will decline as well as airline travel and other sorts of economic factors that require gasoline (and products) to get supplies/people from one place to another.

Falling crude prices are deemed to be a boost to consumers, as falling gas prices at the pump helps consumers keep more in their pockets – all of which will be very needed if the economic conditions continue to deteriorate.

Let’s zoom the chart in to the daily chart.

Crude Oil Daily:

We see the progression of three “new momentum lows” on the chart as price moved steadily to the downside.

Price initially found support about the 200 day moving average, but failed at the confluence zone of the 20 and 50 EMAs overhead.  Selling accelerated as price broke the 200 average.

A clean retracement took price back to the ’super-confluence’ zone of the 20, 50, and 200 period moving averages… where it failed to overcome such resistance and traveled lower into new October lows.

Despite all the red (selling), there’s a potential for good news, at least according to a simple Elliott Wave count (not labeled).

The initial price thrust down to the 200 period MA could be Wave 1; the flat retracement before breaking the 200 MA could be Wave 2.

Wave 3 may have occurred when price broke to new lows in September while Wave 4 was a quick, four day solid advance to the confluence resistance zone which then led to new October lows in the current Wave 5.

IF this is the correct count, then Wave 5 is expected to end soon, and upon its termination, the “ABC” Corrective phase will commence, which could take price as high as $100 (in time) as these three waves begin (A wave up; B wave back down; C wave back up).

Let’s see if this indeed is the case, and if so, it might be a good idea to exit short trades in oil soon.

As a special Bonus, I wanted to include a link to the Market Club’s Third Quarter ‘trade triangle’ trading results (performance) in Crude Oil.  They reported six ‘trade triangle entry’ trades, with four winners (capturing the trend moves) and two losers, for a potential gain of over $20,000 for pure signal-based traders using their software (slippage and trade size will affect results – they quote results based on trading one futures contract).  Check out the video for more information.

***

Published by Corey Rosenbloom of Afraid to Trade.   Click to receive the Afraid to Trade Feed.

Also, click to join the Afraid to Trade blog (free) as it continues to expand.

It’s worth looking at some of the long term charts on the monthly time frame of some of the key homebuilder stocks and how they peaked around 2005, and then compare that to various Financial Companies that peaked in late 2007 to see the leading characteristic that brought down the Equity Markets lately.  For this example, let’s look at Beazer Homes (BZH) and then Citigroup Financial (C).

First, Beazer Homes (BZH):

Clearly, what goes up does not have to go up forever – but usually the fall isn’t this hard.  The mortgage and homebuilder ‘collapse’ in 2007 showed up previously in the charts, as most leading homebuilder stocks (Pulte Homes – PHM, Meritage Homes – MTH, etc) peaked similarly before news began to be massively public that these companies were in trouble.

Many of these stocks had run-up in value so much that it was difficult to see any potential danger in them.  But let’s look at the charts for clues of early deterioration.

Beazer showed a “Three Push” pattern which can often form tops – the pattern was complete with a ‘flatline’ negative momentum divergence (shown) which confirmed the pattern.  In essence, the pattern signals that bulls are giving it all they have, fall back down to sellers, push prices higher, and finally give up to sellers, having exhausted buying power available.

Following the “Three Push,” price shattered the rising 20 month EMA without even a hint of a bounce and found temporary support just beneath the rising 50 day EMA which is the second target of support after an initial 20 EMA break (Pulte Homes supported exactly at the “50″).

A bear flag formed, the flag of which lasted 3 months before finding resistance about the (now) falling 20 month EMA and shattering the ‘50′ again into new lows for 2007.  A quick two-month bounce (now a retracement in a confirmed downtrend) fell short at the major confluence point of the 20 and 50 period EMAs as they crossed, signalling “abandon ye all hopes all bulls who enter here.”  Price then plunged to $10 a share, and now trades currently beneath $4.00.

Beazer peaked in late 2005/early 2006, and financial stocks were up next on the firing line, so to speak.

Let’s look at a major example:  Citigroup

Citigroup (C):

Citigroup found multiple support tests (buying opportunities) each time price creeped back to the rising 20 month EMA before rallying sharply above it, testing it in a semi-”Falling Three Methods” candle pattern before breaking the “20,” finding only temporary support at the “50,” forming two doji candles (of indecision) and then falling quite precipitously down through these averages as 2007 came to a close.

The selling was relentless, as was the volume.  We never know how far a move will take price, and we always have a tendency to wait for a reaction, whether to get short initially, or exit (“Oh, I’ll exit at the next bounce-up”).  It’s these run-away, mammoth sustained volatility moves that can do severe damage to trading and especially investment accounts.

The lesson is to pay attention to the larger structure and how price is behaving or situating itself on the larger timeframe for insights into what type of position/bias to have on the smaller timeframes – no matter what your style of trading.

***

Copyright and Published by Corey Rosenbloom of Afraid to Trade.
Click to receive the Afraid to Trade Feed.

Also, click to join the Afraid to Trade blog (free) as it continues to expand.

Gold has been stunning traders both on the longside and short-side.  Adam Hewison released a great video to describe different time frame action, as well as reveal insight into possible future direction thanks to their “Trade Triangle” Technology.  Let’s compare charts and see what he means about gold.

First, let me display my quick interpretation of the daily chart:

Most noticeable is the series of lower lows and lower highs in gold prices (per ounce) which defines a stable downtrend.  Price is beneath all three key daily moving averages, and they are in the ‘most bearish orientation’ though just slightly so (20 beneath the 50 beneath the 200).

I wanted to make a note of something many people may miss in their analysis – regarding candle patterns.  We get caught up in defining what a candle is (hammer, doji, evening star) but sometimes forget the structure or ‘meaning’ behind them (why we expect them to ‘work’ because of how they reflect the struggle between buyer and seller).

I don’t know of a term for this other than “Long Upper Shadows” which had developed consistently about the $920 – $940 range, but just look at the numerous ‘price rejections’ of these levels considering how many times they have been tested in September/October.  Long upper shadows mean that price opened at a certain level, rallied up intraday, then gave back all or most of the gains of the day to close nearer to the open or beneath it.  Whatever you call it, it has bearish implications, because sellers are stepping up at those levels despite buyers continuously trying to push them there.

Should the buyers ‘give up’ or should value be determined at a lower level, price will fall, which is what is currently happening in a down-swing from these ‘long upper shadow’ levels.

Other than that, momentum broke a trendline to the downside and is not far from a potential new momentum low, and subsequently new price lows should we take out the $740 level.

That being said, let’s watch the decent sized (8-minute) video from Adam Hewison entitled “Gold – the Game Changer”.

Hewison takes us through the monthy, weekly, and daily gold charts, annotating them heavily, and emphasizes his take on the most likely direction with price targets.  He then describes a few methods to trade this move beyond buying/selling futures contracts, such as trading Barrick Gold (ABX).

Let me (Corey) make a comment about Barrick (ABX).  ABX actually made a lower low beneath the September low in Gold, which has even more bearish overtones for the commodity, as often stocks will lead their respective commodities.  Take a look at ABX and compare it to the price of gold.

Hewison writes (copied with permission):

“There’s no doubt about it, these are volatile times and that is reflected in the broad swings in all of the markets. One market that had a huge move Thursday (10/16) may have produced a game changer that you can make money on.

I’m referring to a major commodity that has not acted like it would normally act in an economic crisis. In this short video, you will see exactly how we have positioned ourselves and what we expect will be the course of this market in the short term.

The new video, which requires no additional download, also includes a well know stock that tracks the above market very well. You will see first hand where we expect this market to go to.

The video is available now. There is no charge and we believe it will help improve your trading in these volatile times.”

***

Copyright and Published by Corey Rosenbloom of Afraid to Trade.
Click to receive the Afraid to Trade Feed.

Also, click to join the Afraid to Trade blog (free) as it continues to expand.

Despite the volatility of last week, a relatively orderly symmetrical triangle is forming on the S&P 500 Index which could be resolved early next week.  Let’s examine the S&P 500 daily structure and then the 30min chart for clearer insights on this consolidation pattern.

S&P 500 Daily:

The daily chart looks horrendous for long-term investors and indeed it has been.  Price was unable to successfully rise above the 50 day EMA meaningfully since May (what a long time ago that seems).  Price is now beneath all three major moving averages and they are in the most bearish orientation possible.

Price appears to be winding down into an equilibrium level (consolidation pattern) to digest some of the rampant movement over the last few weeks.  It would seem logical to expect some sort of upside break and test at least of the falling 20 period EMA or beyond, but we wait for the current structure to unfold for insights or clues of that occurring.

Momentum made a new significant low and I cannot underscore how large a low that was.  The oscillator is the difference between a 3 period and 10 period exponential moving average, and on October 13th, that differential (spread) was 100 S&P points – remarkable.  The spread now is around 40 points and will likely narrow as price consolidates.  Still, new momentum lows are not bullish long-term.

I wanted to highlight the triangle consolidation forming on the lower-time frame charts.

S&P 500 30-minute chart:

As of Friday’s close, the triangle was well-defined and perhaps has a little more ‘way to go’ until it is complete, or when price breaks out usually 2/3 to 3/4 of the way to the “Apex” or place where the converging trendlines meet.

If the triangle is the dominant structure, then a test of 890 to 900 – the rising lower trendline – would be the expected play, particularly since the most recent up-swing was a full and complete 5-wave Elliott Pattern (that I highlighted and predicted on Thursday and Friday’s posts).  I’m finding success applying Elliott’s principles to the shorter time frames.

We’ll see if this structure continues to play out, and will be waiting the eventual break – up or down – of the triangle which should lead to yet another volatile or sustained price move (which ‘feels like’ it will be to the upside – but no promises yet).

Join the MarketClub for daily commentary/analysis/trading signals.

Copyright and Published by Corey Rosenbloom of Afraid to Trade.
Click to receive the Afraid to Trade Feed.

Also, click to join the Afraid to Trade blog (free) as it continues to expand.

If you’ve ever wanted an easy, three-click method for price projection targets from what you perceive to be bull or bear flag set-ups, check out this simple method using traditional Fibonacci tools in TradeStation (similar in other charting packages with the Fibonacci Projection Tool).

Let’s not discuss Fibonacci, but just the “100% Equal/Measured Move” of a prior impulse.  Flags target an ‘equal move’ of the pole, once a retracement has formed.  Search this blog for “Bull and Bear Flags” for more information, or check out any reference on bull/bear flags.

The Flag forms a clean retracement against an intial impulse (usually a sharp price swing) which often retraces to a key moving average or perhaps the 50% Fibonacci retracement.  Once you believe that price has broken OUT of the mini-channel that a flag forms, THEN it’s time to enter and project a price target for how far the move is expected to travel (for purposes of risk/reward and trade management).

Here’s how I do it in TradeStation:

Once you identify a possible flag breakout (we’ll discuss bull flags here), then click on the “Fibonacci Price Extension” lines under the “Drawing” tab.

Your cursor will change to the extension tool, and your objective is to click on the BOTTOM of the Flag Pole, then click at the TOP of the Flag Pole (the “Impulse Swing” move), and finally make your third click at the BOTTOM of the perceived flag.

Keep in mind you’ll need to do this AFTER price has broken above the trendline to the upside so that you’ll have a confirmed break to the upside.  Failing to wait for the break could cause a premature projection, and the price may travel a little lower than where your projection started… but if this happens, simply re-draw the Projection.

The program then draws multiple lines on the graph, but you’ll need to cull it down a bit for clarity.  Double-Click on the Fibonacci lines drawn and open up the Editor tool for the Price Extension.

Uncheck everything EXCEPT fot the 100% retracement line (this is really the most important step).

After this, you can change the color or thickness of the lines – which is of secondary importance.  Here is a screencap of what this looks like:

Once you make these changes, you’ll wind up with a grid that only projects the 100% projection, which is an exact measured move of the “Pole” that begins (is added) at the bottom of the Flag you chose.

I’ve cheated a bit and given you a complete projection, and sometimes you’ll need to drag your chart (scale) to see the actual projection.  Click for larger image:

TradeStation gives you the EXACT price of the target, which will help give you an exact idea in mind and will help in Risk/Reward calculations (as your stop will be an exact number as well – placed just beneath the lower-trendline of the flag).

The Blue Line (100%) was drawn by TradeStation, and what you’ll find more times than not is that price at least pauses and sometimes totally reverses at the 100% projection, or exact Measured Move of prior impulses.  Whatever the reason (those are all debatable), it sets up an excellent trading opportunity with low risk (tight stop) and larger target (100% Projection).

Try it out and see what additional insights you can find with this very useful tool.

Copyright and Published by Corey Rosenbloom of Afraid to Trade.
Click to receive the Afraid to Trade Feed.