It looks pretty clear at this point that WTI Crude Oil futures have broken down from a substantial topping formation. A head and shoulders top could be drawn a few different ways. I prefer not to get hung up on every detail of a chart pattern or the measuring implications. The bottom line here is that crude oil has broken below a threshold that leaves it without any meaningful technical support until the region of 88.00. That means position traders should be focusing on the short side of the market.
But, that doesn’t mean this is the time to enter the trade. Crude Oil prices have come down very far from its June peak. The decline happened very quickly compared to the rise that started in March. There’s a high risk of a temporary bounce soon as momentum traders who sold short recently secure gains by buying back. A safer approach would be to wait for the next bounce or consolidation before initiating a short position. An ideal situation would be a recovery to around 98.00 – the threshold beneath which the market began accelerating down.
Given the high volatility of this market, you’ll need to be comfortable with a relatively loose stop loss. That could mean limiting your position size in order to allow for a loose stop; this way you adhere to strict trading rules that prevent you from risking too much of your portfolio’s value on any one given trade.
Have a great weekend. Good trading, everyone.
No position in any of the mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.