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Crude Oil - To Rally Or Not To Rally? Why We Love Pictures! The Stage Appears To Be Set.

Saturday  21 November 2009

 We are advocates of two primary factors in trading: 1. Knowledge of
the trend, and 2. Use of present tense market activity.  The first one
is easy to understand, for it leads to the path of least resistance. The
second makes equal sense, but few seem to understand the implications. 
The market itself is the most reliable source of what is going on, day by
day, week by week, whatever time frame one chooses.  It provides the
purest form of market information, untainted by artificially imposed
trading tools that failingly attempt to define the market, at least in a
consistent manner, for we must acknowledge that even a stopped clock
can be right, on occasion.

The weekly chart of Crude Oil is providing concrete information.  The
past four weeks are showing a cluster of closes.  This is a message that
the market has reached a level of equilibrium between the forces of
supply and demand.  What can be expected is an eventual imbalance,
where one force starts to take over and dominate.  We can use the
information generated by the market to draw some informed decisions
from the pictorial facts.

Look at the character of the last four trading bars.  Each one has a close
on the lower end of the bar.  Why does that happen?  Sellers are keeping
buyers on the defensive, so it would appear from the information provided. 
If sellers are on control while the market is in a stage of balance, the tipping
of the imbalance may lead to lower prices.

It may appear that way, but many of us know that appearances can be
deceiving.  We are of the mind that buyers will prevail, and that crude is
about to stage another rally.  Here is our logic.

Four weeks of net selling seemingly puts sellers in control of price activity,
and we would agree, with reservations, and a few questions.  What has
been the net result of four week's of selling effort?  How far has price
declined during the four weeks shown?

Answer?

Self-evident.  Very little progress.  After all of that effort, and with no results
to show for it, maybe the sellers are not so strong and not so much in
control?  Of the four weeks, last week was the highest volume, [think effort],
and price closed lowest for the period.  If sellers are in control, where is the
downside follow-through?

The support channel line is still holding, but that is not as important as
WHERE all of this is occurring.  We described Crude Oil when it broke out,
in a previous article back on 19 October, a month ago,
Crude Oil - Picture Perfect Breakout .  Note the horizontal line drawn
across the August highs, prior to the breakout.  That was resistance. 
Once price rallies above it, previous resistance now acts as support.
Where has all this selling effort occurred?  Again, self-evident: right on an
area of support!

Any time you see a trading range develop on top of a previous trading
range, it most often is a bullish statement.  You can see why we are such
strong advocates of using present tense market information.  The market
is telling us everything we need to know.  It has distilled all the known
information from every imaginable source and conveniently put into a
format that is easy to read, not that reading it is always so easy.

Now we can put the facts gleaned from the weekly chart into a reasoned
consideration: 

1. The trend is up, the line of least resistance.

2. Sellers have tried unsuccessfully to drive price lower for four consecutive
weeks.

3. The current trading range is occurring on top of a previous trading range

4. The trading range is also holding above an important breakout level. 

That seems like some fairly cogent information.  Let us proceed to the
daily chart for better timing and execution of what has been learned.

 

 CLG W 20 Nov 09

 The previous August breakout high is shown by the horizontal line carried
over from the weekly chart.  Cutting to the chase, the two most important
days appear to be the two lowest lows of the entire trading range.  We can
determine a few more pieces of information from them.  Both are smaller
ranges, and that tells us that at the weakest level of the trading range,
sellers were unable to extend price lower.

Why not?

There was buying coming in.  Understand that smart buying comes from
lower levels, and that specific bar, six bars from the end, shows exactly
that.  Price went under the previous three week's trading range, and
instead of more selling coming in, price stopped and held.  Where did it
hold?  Right on top of the previous breakout trading range from August,
a point of support.  That support line is obviously doing its job.  From that
small range, a rally ensued but stopped four days later.  This tells us that
the market has not finished retesting the lows, and another retest took
place this past Friday.  Results?

Another small range bar, smaller even than the last failed probe lower. 
Plus, all of this activity is taking place on the right hand side of the trading
range.  The further along the right hand side of any developing situation,
the closer it is to a resolve.   This is why we believe the stage is set for
another rally in Crude Oil, from a read of market-generated information, 
aka the most reliable source. 

There are always two sides to any story, and it could be that Friday was
just a resting spell just prior to price decisively breaking support and going
lower.  It is very much a possibility, but given our read of market behavior,
the probability is considerably lower than that of the opposite case just
presented.  All that is needed now is confirmation that price will rally.

What might that confirmation be? 

A rally.

We saw signs of it during the intra day activity Friday but opted not to take
a position until the direction of anticipated price movement begins to move
in that direction.  If we are correct in the analysis, price has some room to
run.

We are ready and prepared.  Exit stage left, sellers.

CLF D 20 Nov 09