Since taking off from the new lows of 42.41 established on Tuesday March 17th, crude oil is coiling. Trade has been contained within the trading range of the March 18th rally to the 47.48 high and its 44.07 low. The rally on Friday to 47.43 failed to take out the high and formed a small body candle with shadows on both sides (a Spinning Top). Crude needs to break out from Wednesdays candle to create energy for its next move. Trading above this high would set up the 21 DMA as a potential target for crude oil up at 48.18. Trading below the low would set up a run to lows testing the trendline down at 41.79.
A rally in crude would be difficult to maintain with the downward crossover of the 21 and 50 DMAs, in my opinion. Plus, the short-term moving averages crossed over to the downside after trying to cross up. Crude’s downside leaning is refreshed. Crude also has the long-term moving averages pointing down. It would take a couple of closes above the 50 DMA to signify a change in sentiment, in my opinion. This would push MACD above the zero line and add credence to the sentiment change. I therefore believe rallies should be sold into and buying put spreads on rallies would be a way to take advantage of this scenario.
Trading below the lows keeps the downtrend intact and putting the 40.00 level as a potential mark. A break of this level could send Crude to the 37 area where buyers should appear. If buyers refuse to enter here, Crude could test the lows from February 2009 at 33.55. I therefore propose the following trade. Look at buying the May Crude 40.00 put and selling one May crude 37 put for 20 cents, or in cash value $200.00. The risk on the trade is the price paid for the spread plus all commissions and fees.
