Trading Crude Oil with Divergences into Key Levels

Feb 10, 2015: 11:37 AM CST

How can momentum divergences help your trading style?  Simple – by providing early warning signals of market reversals.

But divergences alone aren’t enough to trigger a trade.

Let’s see another example of one of my favorite trade set-ups that played out recently in Crude Oil, and of course what levels we’re targeting now.

First, take a moment to review a few current posts about divergences including:

“Amazon’s AMZN Bullish Surge from Support with Divergences”

“Quick Lessons from Divergences and Reversals in MNKD”

Now, let’s talk about Crude Oil.

After a persistent downtrend, mutliple positive divergences built-up in the price structure (noted from the start of January until the final low in late January).

First and foremost, a divergence DOES NOT give anyone permission to fight a trend or trade a reversal.

Note how long the positive divergence extended – a whole month on the 30-min chart – before price actually DID reverse the intraday trend.

There was a false start mid-January with a spike up that failed at the $50.00 level as the downtrend continued.

However, note the big divergence and the breakout of the falling trendline that kicked-off the month of February on the re-break above $46.00 per barrel.

It’s the combination of lengthy divergence PLUS trendline break that gives a tradable entry, complete with a stop-loss (conservatively beneath the trendline but preferably beneath the expected reversal low).

In this case, Oil reversed all the way to the 61.8% Fibonacci Key Target Level before failing today – with another trendline trigger break – at the $54.00 level on another lengthy negative divergence pattern.

Oil now trades down away from $54.00 toward the first target near $50.00.

A breakdown under $50.00 suggests oil will continue falling toward the $48.00 low or even beneath that.

No indicator is sufficient to give perfect trading signals in isolation.

While divergences – especially lengthy divergences like these – are helpful in trading reversals, always wait for the trigger-break to occur in the form of a price breakthrough beyond a hand-drawn trendline before jumping into a coveted reversal opportunity.

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Corey Rosenbloom, CMT
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2 Responses to “Trading Crude Oil with Divergences into Key Levels”

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  2. Nasima Says:

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