The sharp sell-off for crude oil following OPEC’s announcement regarding supply management gave us another classic example of volume price analysis in action on the daily chart and how it reveals the truth behind the price action. The reaction occurred on July 19 with a plunge in price which saw the WTI September contract close at $66.35 per barrel having opened the day at $71.09. However, note the volume on the day. Is this what we should expect after such an extreme move? The short answer is no, particularly when we compare it with other candles and associated volume. What is instantly apparent is we should have seen twice the volume and more. So the conclusion is clear. The big operators are not selling heavily into this move and it is simply a shakeout as we have witnessed several times in U.S. equities, and so it has proved to be.
The candle also triggered the volatility indicator, as the price action was outside the ATR for this timeframe with the anticipation of either congestion or a rally to follow which in this case is a rally.
The result is we have seen oil recover all its losses and move back to trade at $71.74 per barrel at the time of writing, with buyers returning the following day on the hammer candle on good volume. This rebound is also against this week’s build in oil inventories, which was against the recent run of a fall in the stockpile and came as a surprise against the market’s expectation of a -4.6m bbls draw.
Instead, the release came in with a +2.1m bbls. But even this was not enough to dent bullish sentiment, which continued on Thursday. In the medium term, I am expecting to see oil return to test the highs of earlier in the month at $75 per barrel.