Rounded Reversal in Crude Oil

Feb 3, 2009: 11:36 AM CST

Crude Oil prices, as seen by the $WTIC, have found significant support near $40 per barrel and may be forming a rounded reversal pattern on the daily chart.  Let’s see this development.

Crude Oil ($WTIC) Daily:

Crude Oil

Remember that $40 per barrel was significant resistance in 2000 and 2003, which was broken in 2004 that set the stage for the powerful rally that took crude near $150 per barrel – giving most Americans gasoline prices greater than $4.00 per gallon.

Crude Oil has fallen significantly from that level and has retested the $40 support level, breaking it gently in late December.  Otherwise, price has found support at this level (blue line).

What’s happening now is two things.  First, A multi-swing positive momentum divergence has been developing since November which could be showing either building strength in buyers or weakening strength in sellers.  Divergences often precede trend reversals but clearly are not 100% accurate.

Second, price itself appears to be forming a “Rounded Reversal” type pattern as price gently heads to new lows and then curves upwards in an arc to complete a gentle, relatively pain-free (no spikes) trend reversal.  Price could form a type of mirror-image of the prior decline… but to the upside.

We’ll know this will become the dominant pattern if we break above $50 per barrel any time soon, which would put price above the flat 20 and 50 day EMAs, clearing the EMA resistance.  There would be Fibonacci resistance overhead, but let’s focus on the EMAs for now.

Of course, if price broke the December lows beneath $35, we would know this pattern and structure failed.  It’s good to know exact price points that will prove your analysis right or wrong, which allows you to set targets, entries, and stop-losses.

Whether or not we do find a reversal here, the risk-reward is clearly skewed to the buyers, making it the cleaner position.  If you enter here ($40), your stop would need to be beneath $35 but your target could be upwards of $50, $60 or greater depending on your conviction and how far price does travel if it reverses (of course, use different numbers depending on the ETF you trade, be it USO or a leveraged fund).

Use your own analysis and see if you find additional insights in the price data itself (perhaps with other indicators, etc).

Corey Rosenbloom
Afraid to Trade.com

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11 Comments

11 Responses to “Rounded Reversal in Crude Oil”

  1. RK Says:

    Hi Corey,

    Have been following you blog for a while now. Very interesting observations. Looked at oil and it seems to me that we are forming a perfect HS pattern on oil since mid Jan and the same goes for SPX. Am I creating images or do they really exist. I am new to the TA game.

    Your insight much appreciated.

  2. Corey Rosenbloom Says:

    RK,

    There’s a very valid argument that we are indeed forming an Inverse H&S Pattern specifically in the S&P and other US Equity Indexes. If so, that’s a bullish reversal pattern that could – in theory – mark the bottom of the market, or at least set the stage for a decent sized counter-rally.

    I’ll believe it when I see it, but there’s just too much else going on that a single chart pattern is unlikely to overrule all the other structures, but hey it’s also a bad idea to rule anything out in the market (remember, the market can do anything a la Mark Douglas).

  3. DaveB Says:

    I’ve been keeping tabs on oil every day and I see the same things. WTIC has been holding the $40 level. I thought we it was set to rally a couple of weeks ago but that breakout fizzled out quickly, falling short of the 50ema.

    I’ve also been watching the uranium market. Stocks like DNN had violent rallies back at the start of the year. I was hoping to see DNN and URRE find support at their ema’s and have a 20/50 crossover but it doesn’t seem to be happening. What’s your take on these?

  4. Anonymous Says:

    Corey,
    With regards to the possible rounded reversal, what do you think of the fact that oil made 3 lower highs recently, $52.95, $50.47 and $48.59 with $40 acting as support each time. It seems to be knocking on the door for a move down to retest the $35.00 area. Do you still think the odds favor the bulls?
    thanks,
    Dan Martin

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