Traders and investors who follow our work will be familiar with how we use technical analysis in our work. In the crude oil market for example, there always can be a host of fundamental reasons why the price of commodity will go up or go down. We do not try to play this game, though. What we invariably concentrate on is the price action on the technical chart.
Our biggest premise is that market action discounts everything. We believe that everything which could possibly affect how crude oil trades, for example, has been already reflected in the price. In fact, if prices fall on the daily chart, we believe this means that demand exceeds supply. This then would lead us to believe that the commodity's short-term fundamentals are more bearish in nature than bullish.
Remember, as chartists, we believe the culmination of crude oil's fundamentals at any given point in time can be seen on the technical chart. We are not overly concerned with why the commodity rises or falls. We merely focus on the result through technical patterns and how price is moving through its daily and intermediate cycles.
Therefore, with this in mind, let's see how crude oil has been cycling of late. We will start off with the daily chart.
The jury is still out on whether the low in early July last marked the beginning of a brand new daily cycle in crude oil. We would have preferred a longer cycle here as this low took place only a mere 20 trading days from the previous daily cycle low in June. We can also see from the daily chart that the RSI did not drop to oversold levels like we had both at the June and May daily lows. At present, price is trying to close above its 10-day moving average.
We actually have a swing low here, but we still have not broken out to fresh highs. Therefore, we will be watching how price behaves over the next few trading sessions. It definitely is apparent that there is a fair bit of overhead resistance before we could see fresh highs. This leads us to the likelihood that price will make lower lows to print a new daily cycle low.
We still maintain that the recent weekly lows (which occurred 5 weeks ago) will end up being an intermediate low in crude oil. We cannot call this low as an intermediate low at present because price still has not closed above the declining intermediate trend-line. The odds are good though that crude has started a brand new intermediate cycle for the following reasons.
- We have a weekly swing low.
- The June low took place 23 weeks after the low on Christmas Eve last year. This means we were definitely in the timing band for a new intermediate cycle.
- Both the slow stochastics and the RSI momentum indicator dropped to levels which are indicative of the numbers we normally see at intermediate cycle lows.
With any potential swing play, we always aim to put ourselves in positions which will give us strong upside potential whilst also minimizing downside risk. The next clear buying opportunity in crude oil will come at its next daily cycle low. Crude oil in all likelihood is still only on week 5 of its present intermediate cycle. Realistically, as long as the cycle right translates (tops in the latter half of the cycle), we should not see an intermediate high until at least week 15. This means we still have plenty of upside potential in this intermediate cycle.
What we want to happen is a daily cycle low to occur somewhere around the $54 level. If we can get in near this level, the upside potential would be at least $6+ per barrel as price already topped out above $60 a barrel in this intermediate cycle. We will remain patient while we wait for an entry.
Elevation Code's blueprint is simple. To relentlessly be on the hunt for attractive setups through value plays, swing plays or volatility plays. Trading a wide range of strategies gives us massive diversification, which is key. We started with $100k. The portfolio will not not stop until it reaches $1 million.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.