These are undoubtedly volatile days for the financial markets. After the coronavirus pandemic and the worst US inflation in over four decades, we're experiencing Europe's most significant land war since World War II.
Commodities, which were already skyrocketing, escalated their climb when Europe ramped up sanctions against Russia and the US banned Russian oil and gas imports. There is also a fear that Russia might retaliate by stopping exports to Europe. All of this is exacerbated by the ongoing nuclear talks with Iran, which could put Iran oil back in the market. And then yesterday the UAE said it wants OPEC to increase production.
As a result, oil fell by more than 12% on Wednesday in the worst selloff in two years. However, when the UAE toned down its rhetoric, saying it was committed to its agreement with OPEC+ and its current monthly production adjustment mechanism, the price then jumped 5%. But we expect oil to extend its selloff given the complicated mix of market drivers currently on deck.
The current rise has the telltale signs of a bearish pattern in the form of a rising flag. The rise followed a sharp plunge, during which prices fell practically in a vertical motion. WTI plunged 18% in four consecutive red 4-hour candles. A spike in volume accompanied the move. Conversely, the rebound has no support, with the thinnest volume on the chart. The flag is developing right on the neckline of an H&S top. A downside breakout is required to call the flag complete; same for the H&S top.
Trading Strategies
- Conservative traders should wait for the downside breakout of the H&S top, with at least a 3% penetration, and that the price should not climb back above the neckline for at least three days, preferably including a weekend.
- Moderate traders would risk a short with a downside breakout of the rising flag.
- Aggressive traders could short right now, provided it agrees with their trading strategy.
Here is an example of a generic trade plan:
Trade Sample - Aggressive Short Position
- Entry: $114
- Stop-Loss: $115
- Risk: $1
- Target: $106
- Reward: $8
- Risk-Reward Ratio: 1:8
Author's Note: The above is just a sample. By definition, that means there are other ways to approach the trade based on one's style, subject to timing, budget, and temperament. Our analysis is one interpretation based on the principles of technical analysis—not magic. No one knows what the future holds, and the objective of technical analysis is to side with statistics, a proposition whose chances increase over time with a consistent, systematic approach. Until you learn how to form a personal plan, follow ours. However, do so to learn rather than to profit. If you focus on profiting, something not likely if you're a beginner, you'll lose heart and give up before you've had a chance to learn.