Oil was volatile on Wednesday as bulls and bears traded opposing themes. The dollar rose 0.4%, advancing for the seventh straight session to the highest since May 14, 2002. Given that oil is priced in dollars, a higher greenback makes oil more expensive, denting demand.
Also, according to API, crude oil inventories rose by 4 million barrels last week, significantly more than the 333,000 analysts expected. As a result, traders repriced the contract according to its sudden oversupply.
On the other hand, Hurricane Ian, which has arrived in the Gulf of Mexico and is expected to reach Florida later today, has curbed supply, strengthening oil prices.
So which theme will win? Let's take to the charts.
If the price rises above the trendline connecting the hourly highs since Sunday, probably above $80.00, it will complete an H&S bottom. Note how that neckline coincides with the bottom of a Falling Channel.
On the daily chart, we can see that the price fell below a secondary falling channel and has been unable to climb back into it for the last two sessions, suggesting a resumption with the original, faster falling channel.
The 50 daily moving average (DMA) crossed below the 200 DMA at the beginning of the month. The price then fell below its uptrend since the Apr. 28 low. I ignored the subzero activity, as it was an outlier in the trend, and every uptrend I draw from that low is already violated.
The price had fallen 18% since I predicted its fallout when oil was still trading at $96.50, having competed first a symmetrical triangle, which developed into a descending triangle. Its return to the steeper falling channel reinforces my call toward $56. Note how the (green) rising channel top since the April low coincides with the symmetrical triangle.
Trading Strategies
Conservative traders should wait for the price to return to the top of the steeper falling channel and await resistance before risking a short.
Moderate traders would short with evidence of supply by the downtrend line since Aug. 30, or for a new low and a rally overrun by bears.
Aggressive traders could short and flip to a long if the hourly H&S bottom completes.
Trade Sample 1 - Aggressive Short
- Entry: $79.00
- Stop-Loss: $80
- Risk: $1.00
- Target: $76.00
- Reward: $3
- Risk-Reward Ratio: 1:3
Trade Sample 2 - Aggressive Long
- Entry: $78 (After closing above the neckline, then dipping)
- Stop-Loss: $77.50
- Risk: $0.50
- Target: $79.50
- Reward: $1.50
- Risk-Reward Ratio: 1:3
Disclaimer: At the time of publication the author had no positions in the stocks mentioned.