Rounded Reversal In Crude Oil

Crude Oil prices, as seen by the $WTIC, have found significant support near $40 per barrel and may be forming a rounded reversal pattern on the daily chart.  Let’s see this development.

Crude Oil ($WTIC) Daily:

Remember that $40 per barrel was significant resistance in 2000 and 2003, which was broken in 2004 that set the stage for the powerful rally that took crude near $150 per barrel - giving most Americans gasoline prices greater than $4.00 per gallon.

Crude Oil has fallen significantly from that level and has retested the $40 support level, breaking it gently in late December.  Otherwise, price has found support at this level (blue line).

What’s happening now is two things.  First, A multi-swing positive momentum divergence has been developing since November which could be showing either building strength in buyers or weakening strength in sellers.  Divergences often precede trend reversals but clearly are not 100% accurate.

Second, price itself appears to be forming a “Rounded Reversal” type pattern as price gently heads to new lows and then curves upwards in an arc to complete a gentle, relatively pain-free (no spikes) trend reversal.  Price could form a type of mirror-image of the prior decline… but to the upside.

We’ll know this will become the dominant pattern if we break above $50 per barrel any time soon, which would put price above the flat 20 and 50 day EMAs, clearing the EMA resistance.  There would be Fibonacci resistance overhead, but let’s focus on the EMAs for now.

Of course, if price broke the December lows beneath $35, we would know this pattern and structure failed.  It’s good to know exact price points that will prove your analysis right or wrong, which allows you to set targets, entries, and stop-losses.

Whether or not we do find a reversal here, the risk-reward is clearly skewed to the buyers, making it the cleaner position.  If you enter here ($40), your stop would need to be beneath $35 but your target could be upwards of $50, $60 or greater depending on your conviction and how far price does travel if it reverses (of course, use different numbers depending on the ETF you trade, be it USO (USO) or a leveraged fund).

Use your own analysis and see if you find additional insights in the price data itself (perhaps with other indicators, etc).

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