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Chart Of The Day: Oil Headed To $40?

By Investing.com (Pinchas Cohen/Investing.com)CommoditiesFeb 27, 2020 09:53AM ET
www.investing.com/analysis/chart-of-the-day-oil-headed-to-40-200511246
Chart Of The Day: Oil Headed To $40?
By Investing.com (Pinchas Cohen/Investing.com)   |  Feb 27, 2020 09:53AM ET
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2020 hasn’t been kind to oil bulls. After the Jan. 6, $63.27 close, it’s been down hill all the way. But that’s only part of the picture.

Oil has been ranging since April 23, after notching up the $66.30 close, while the bottom of its trading pattern has been $50+. That congestion followed 2018's dismal performance, the worst year for black gold since 2015. From U.S. President Donald Trump's pressure on OPEC to shrink supply in order to keep prices down, to the U.S.-China trade war saga, the challenges to the oil markets have come thick and fast.

And now a potentially devastating global pandemic is looming. Not only is the coronavirus outbreak wreaking havoc on manufacturing, global shipping, airlines and tourism, it also creates a high risk that the trade deal comes undone. China will almost certainly not be able, or willing, to honor its obligations after spending so much money trying to rescue its economy from the ravages of the virus.

So, where does that leave oil? Its recent technical pattern suggests a $45 target and the longer range implies a target even lower than $40. However, we expect $42 to give a fair fight, a level that has been supporting the price since September 2016.

It’s interesting to note how a return toward $40 is now likely to be accepted as a legitimate target, while just a month ago it was hardly conceivable.

WTI Daily Chart
WTI Daily Chart

The range since Jan. 23 has been within $5 above $50, suggesting that the technical chain reaction will repeat the same distance to the downside, selecting an approximate target of $45.

However, the range from May 2019 provides at least a $13 rectangle, implying that the same mechanism would recreate itself below the $50 floor-turned-ceiling, indicating a target of under $40.

Nevertheless, we wouldn’t aim past the $42 level, which has proven itself a worthy support since September 2016.

Trade Strategies

Conservative traders should wait for the price to retest the $50 resistance, before committing to a short position.

Moderate traders would probably also wait for a pullback toward resistance, for a better entry, not necessarily to receive confirmation of said resistance.

Aggressive traders might enter a contrarian trade, with a measured stop-loss, as the price is likely to pull back before it continues lower.

Trade Sample - Aggressive Trade

  • Entry: $48
  • Stop-Loss: $47.75
  • Risk: $0.25
  • Target: $49.25, below the Feb. 4 low, the lowest within the preceding pattern
  • Reward: $1.25
  • Risk:Reward Ratio: 1:5
  • Chart Of The Day: Oil Headed To $40?
     

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    Chart Of The Day: Oil Headed To $40?

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    Comments (4)
    Jan Skilbrei
    Jan Skilbrei Feb 27, 2020 1:16PM ET
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    remember I commented follow fundamentals last time (I said strong Sell), when you saw buying. Your technicals interesting. Its a little overdone short term yes. But lack of demand, yes, down more. Your SL too tigth (always stopped out), (on your «agressive»). But thanks for your analysis.
    Abhishek Mall
    Abhishek Mall Feb 27, 2020 12:24PM ET
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    Mr Pinchas so much long story shows that you yourself are confused too much. Things should be crystal clear and straight but you more educated people make things so much complicated that even after going just opposite your views you people will counter that. It's a very good art.
    Aaa Zz
    Aaa Zz Feb 27, 2020 10:11AM ET
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    Currently price is 46.34. Its going down without retracement.
    john jordan
    john jordan Feb 27, 2020 9:09AM ET
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    Pinchas recommending a buy, could be time to sell.
    Pinchas Cohen
    Pinchas Cohen Feb 27, 2020 9:09AM ET
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    Conservative traders should wait for the price to retest the $50 resistance, before committing to a short position. Moderate traders would probably also wait for a pullback toward resistance, for a better entry, not necessarily to receive confirmation of said resistance. Aggressive traders might enter a contrarian trade, with a measured stop-loss, as the price is likely to pull back before it continues lower.
     
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