After Monday's 2.6% tumble, crude oil appears to have found its footing today.
There were a pair of catalysts for yesterday's selloff: (1) increased social restrictions in China, the world's largest oil importer, after additional, new cases of the Delta variant emerged, and (2) the outlook for the Fed’s step back from unpreceded stimulus.
The second factor is currently boosting the dollar, which is used to establish oil's base price. A stronger greenback makes WTI more expensive for foreign markets, based on the USD exchange rate.
Since today's rebound in oil prices wasn't triggered by any specific news event, presumably it's the product of short covering to take profits as well as buying on the dip. As such, we’re betting that oil’s advance will be short-lived...something that's also being signaled on the technical chart.
While oil found support by the July 20 low, it technically registered a new trough, which—according to textbook technical analysis rules—establishes a downtrend.
As well, after climbing over the 100 DMA, the price found resistance, evidence of the presence of supply pushing the price back down to the 100 DMA.
Trading Strategies – Short Position Setup
Conservative traders should wait on a short for a close below the $65 level, then for a corrective rally that demonstrates continued supply.
Moderate traders would short upon a close below the $65 area.
Aggressive traders could enter a contrarian long-position, counting on a rebound before another leg down—if their timing is right and they’re working with a coherent trade plan that justifies the risk—before joining the rest of the market with a short. Here’s an example:
Trade Sample 1 – Contrarian Long Position
- Entry: $66
- Stop-Loss: $65
- Risk: $1
- Target: $70
- Reward: $5
- Risk:Reward Ratio: 1:5
Trade Sample 2 – Short Position After a Rebound
- Entry: $70
- Stop-Loss: $71
- Risk: $1
- Target: $65
- Reward: $5
- Risk:Reward Ratio: 1:5
Author's Note: The above are just samples. They don’t pretend to be the only, nor the best way for you to trade oil in this environment. To do so effectively, you need to develop your own style, with a plan that reflects your budget, temperament and timing. Until you do, use our samples—to learn, not to profit. Otherwise you’ll end up with neither...guaranteed. And there's no money back.
Also, remember, analysis is not prophecy, neither ours or anyone else's. It merely weighs the evidence—based on past performance—and attempts to stitch together statistics from repeated, previous attempts. Moreover, our analysis could be wrong. Before you enter a trade, imagine you've lost your money. If you can’t handle that, don’t make the trade.