Wednesday, March 8, 2017

Oil Plunges After Candlestick Warning

Crude oil has had a rough day today.  It is currently lower by $1.90, which is the largest single session decline since January 9th.  There may be more volatility forthcoming as indicated by the Candlestick pattern seen in the two sessions prior to today’s decline.  Specifically, we note a ‘double doji’, where two consecutive sessions with modest or no differential between the opening and closing prices indicates a level of indecision that is often a precursor to upcoming volatile trade.

We need not look too far back to see an additional indication of such ‘indecision’.  As recently as January 27-28, crude demonstrated similar price action following a test of the recent high.  It appears by reaction following these two similar patterns that market participants have become ‘decidedly’ more bearish. 

Looking back a little further to mid-June we’d note that when this pattern developed, crude fell 5.5% within a few days, rallied 10% from there over the next few sessions before falling 22% to a new 10 month low in the next month.  Clearly, the ‘double doji’ has been something to watch for in oil prices.

This is not to say that crude is necessarily going to fall 22% or that it is decidedly in a longer term bearish trend.  Technical conditions themselves do support the prospects for additional declining price action and the near consecutive ‘double doji’ incidents and their resolutions thus far further suggest favoring the prospects for still lower price action. 

Even so, we remain very much impressed with the longer term price action and positioning conditions which first suggested bullish price action was forthcoming back in November when I wrote, ‘Crude, But Not Unlikable’, suggesting those who might be short from $51.70, consider covering shorts at then available $44.52.  We have been constructive since and have not found the sideway price action since early-January as terribly distracting.

Instead, we might view the recent declining price action as an opportunity for bullish engagement should developments in positioning, technical conditions and the fundamental backdrop later, so encourage.  For now, we will advise letting the proverbial knife, hit the table rather than attempting to snatch it out of the air.  My current expectations remain that $45 would hold and that $60 is a more likely target.   

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