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Oil at critical junction - rally on the cards


Mercury

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Oil is a tricky market to trade as it has only a few very large players so is prone to sudden and contrary moves.  USDCAD is a better vehicle if you want Oil influenced exposure in my view but there are big profits to be made on Oil if you chose your moments.

 

Having sat this out for a while I looked back at the long term trend on the weekly chart and concluded that the retrace rally is not over.  conventional fundamentals thinking has it that OPEC can't agree on control so oversupply will keep prices low and even crash the market.  I think Demand is more important, it was a fall off in demand that began the commodities crash after all.  Some commentators think the Oil market will be stable between, say, $40-60.  For my money the Oil market has never been stable in that way and basing trading strategy on what OPEC may or may not do doesn't sit comfortably with me.

 

The EWT count on the long term trend suggests that the bear is not over, with another major leg lower to go.  The market is currently in retrace and while it could have completed at the June 2016 top that seems more likely to be a wave A to me with a wave B completion on 1 Aug 2016.  If the lower support trend line on the weekly chart holds then a wave C rally towards the $60-70 area is likely and a retest of the June 2015 pennant breakout is a credible target.

 

But the markets are capricious at present and looking at the Daily chart there are several decent resistance points along the way towards the target high area.  The first one up is the $57 area, which also occurs in the area of a daily chart Triangle top line and where wave C would equal 0.618Xwave A (a classic EWT ratio for an A-B-C retrace).  [There are 2 others being wave C = wave A and Wave C = 1.618X wave A]  Personally I only use this ratio as additional support so other, more important, criteria needs to be in place for me to trade BUT as a medium term check step it is a valid construct.  I also like the Triangle formation because it makes sense in the context of the wave patterns as overlapping 1-4  (blue) is only valid in an ending Triangle, otherwise something else is going on.

 

Before we get too excited about this prospect the market has to turn at the lower support trend line and rally of course and a breakthrough to the downside would suggest the big move down is on already.  As so often is the case the critical junction is at the lower trendline/triangle line and should resolve in the next day or so.  Note also that other commodities, especially High Grade Copper (AKA Dr Copper) is in a strong rally phase and may also be heading for a much higher high retrace.

 





 

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Oil is now at that critical junction, it often takes time to evolve (sometimes you get a fast bounce but more often than not a slow consolidation before a fast breakout).  Just now Oil appears to be making a turn at an up-sloping trendline with an inside bar formation in play and PMD on 4 hourly and hourly charts and RSI/Stochastic turning up out of oversold on the Daily. On oil the A-B (red) EWT count as part of a complex retrace works the 1-4 (blue) does not due to overlap. A reversal here and break through the supporting trendline brings up a bearish outlook but until that happens the likely scenario of a rally to the $57+ area seems on coinciding with an extended bearish move on USDCAD.

 

On the hourly chart there is a small upsloping right angle Triangle formation and a set of parallel tramlines.  Price is right at this junction which will either send the market back down for another cycle in the Triangle (cue potential bearish breakout) OR breakout with a strong rally.  I do not think this is US election dependent, watch this space.

 



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If speculators start thinking of a possible cut we will see this way before end of the month when OPEC meet. But Mercury the US election can influence oil, also remember market is very heavily short on this, of course i will be looking for an entry after the short, unless you are already in of course. USD CAD i see as equally risky due to Canada being right next door to the US, although technicals and even the fundamentals suggest otherwise and a potential oil rally will help the Loonie appreciate against the US $, for now is is a no go area, unless again you are already in. As you can tell i have my overly cautious hat on today lol.

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NO problem being cautious  but if you are overly so you never trade the good set ups.  How often does it occur that the critical turning point you have been tracking for weeks comes at a big event moment, be it FOMC, BoJ, BoE, ECB, NFP etc etc.  If you are afraid of that then you will miss many the good set ups in my view.  Waiting for a perfect set up with no volatility event risk is a good way not to lose but also not to win.  I prefer to trade my set ups when they meet all my criteria and manage the risk appropriately thereafter.  Having said that neck and neck nature of this election and likely one way impact on stocks in particular make it a no go area for me, although I do not have a good set up on stocks anyway so no sweat.  Similarly on FX, except for USDCAD and possibly USDJPY, I similarly do not have immediate trading set ups BUT if my trigger points are met on these two then I will trade despite the election backdrop.  In fact I have already traded USDCAD short.

 

WRT to Oil and the election, my point is that the drivers of the Oil market are much bigger than the election.  Which of the candidates wins has no bearing on the market for oil, except for the rather long long term alternative energy source policy of the Democrats but that has been around for a long time anyway so not news.  Let's put it this way, which do you think will have a bigger impact on Oil today: the US election result or OPEC announcing a firm deal to curb production?  If you want some empirical evidence look at the Sunday gap action.  On stocks and FX there were significant gaps on the perception that Clinton would not win as a result of the FBI clearing her but only a very small gap on Oil and Copper, which is not unusual in the normal course of events.  As an aside check out the FX pairs that did not gap much, these are lower risk trading vehicles for the next few days.  In particular EURGBP was largely unmoved and EURJPY may be coming to a critical point later today.

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Yes of course, in terms of most market impact indexes and dollar crosses are the ones that get most impacted, and as you say the market gap over the weekend was not as pronounced with oil as it was shall we the say the FTSE100. And in terms of placing trades, I am only this cautious because of the elections and for example Brexit, but you do have to developed your nerves of steel in this business the search for a perfect entry is impossible.

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The critical moment is getting closer and closer for this market (and probably for USDCAD as well).

 

2 scenarios remain in play:

  1. A rally of the retrace, possible at the 76% Fib Wave 2 sending the market off on a strong wave C up
  2. A drop through support levels with no end in sight!

One to watch through today and Monday I feel.  I'll leave most other markets to the weekend to try and make more sense of the post Trump blowout...

 



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I dont think we will have a situation where Oil collapses in the medium to short term. Oil is really driven by OPEC news, hence why the rally was not pronounced during the Trump victory with things like copper and the DOW itself. For me i would be using the current bottom as my watchful eye and await to see how it reacts. I have kept a 15 m chart open with a fib level drawn to see how it reacts. USD CAD may also follow oil, but between now and January their could be some serious worries with the NAFTA trade agreement, of which will add to the suspense. I often find that the market will start giving us clues before November 30th, so if sellers dont make any more progress then that may indicate some good news, which seriously is needed.



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  • 2 weeks later...

Seems like Saudis are keeping everyone on the edge of their seats. From the technical standpoint we rallied towards $50.70 mark which is previous resistance of which also what appeared to be an ABC zigzag formation and now heading sharply lower as a result. However we do have a supporting rising trend line since April of which could act as a support. Overall this could just amount to no more than a production freeze which is why many are not only bearish on oil in general but also those producers such as Tullow, Premier oil who are relying on much higher oil prices and have much higher leverage compared to their own market caps, however looking at Shell and BP they have not suffered to the same degree as the charts shows below.



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Oil is a tricky market to call and I can see a case for an A-B-C retrace completion, indeed that is one of my scenarios (on my chart you can see the Blue 1-2 denoting this scenario).  However if you look at the lower time frame charts the A-B-C is less convincing and I prefer a wave 1 up now in wave 2 retrace.  This could go either way but for now I am seeking a Long at a suitable turning point (confirmed turn preferred but the turn is likely to rally swiftly into a wave 3).  There are 3 possible turning points as denoted by my green circles on the 4 hourly chart.  I would also be looking for a credible 1-5 pattern on this move down to help spot the turn.  USDCAD may also help, I currently see this retracing higher (possible even to a higher high) before descending again.  If we get the twin forces of an Oil rally and a USD (DX) retrace down then USDCAD will fall.

 



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It is possible from your own charts below that it could well be a 1,2,3,4,5 scenario, but it looks for ABC zigzag for me which therefore could indicate it may retest the purple ascending trend line, if that fails then we may not have finished, but this to me seems highly unlikely and instead as drawn on my previous chart it could try a retest and thrust through my previous decending now resistance line and come down again or continue on its bullish trajectory. Until we have something definitive from OPEC on wednesday, which you could not possibly ask for a worse time, funny how they choose to have meetings on the day EIA inventory figures come out, without doubt they will choose to announce after 1530 like last time. Hence why i had chosen to exit my long positions and simply stand aside, unless it intersects some of the more favorable entry points on the charts.



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  • 3 weeks later...

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