Oil Price Spikes: 4 Signs it Won’t Last

 

Oil spiked this week, after commentary made on November 23rd from Saudi Arabia indicating the country is ready to work with exporting nations to help “stabilize” the price.  Traders seemed to take this news literally and bid the price of oil upward from $41.20 to $42.00 per barrel.  A timely quote insertion here, “ifs and buts were candy and nuts, we’d all have a Merry Christmas”.  What you say is great, but what you do is more important.   The ball is in your court Saudi Arabia!

As if this was not bullish enough on oil price, we received further news this morning, November 24th, that Turkey has shot down a Russian fighter plane near the Syrian border.  The thought of further escalation in the middle east is always oil positive.

But there is an older trader saying out there to, “buy the rumor, sell the news”.  So let’s look at three technical signs that this rally will likely fade and ultimately fail to spark a long term uptrend.

 

1. Volume, where art thou?

They say if a tree falls in the forest and no one is around to hear it, does it make a sound?  Well, “they” are asking ridiculous questions.

But we can be certain that, if oil prices rally and volume does not make a sound (stays low), that move should likely have not happened.  The volume is an indicator of how hard the trend is hitting the gas pedal.

Look at the chart below.  The foot is not even hovering the gas pedal is it?  Without an increase of volume, this move is merely a short covering rally, and price will turn lower before week’s end.  Now, if volume climbs up above the 9 day moving average, the game ladies and gentlemen, as they say, has changed.

Oil Prices

 

 

2. MACD said so!

Contrary to popular belief, MACD does not stand for Mac Daddy, or McDonalds, or a new hip hop artist!  This is the FIRST and ONLY lesson all technical analysts should learn when dealing with indicators.

The Moving Average Convergence Divergence (MACD) indicator is the oldest and slowest, but wisest and most reliable indicator.  When this thing turns, you know the trend has changed, and it takes a lot of momentum to cause it to turn.

Currently, RSI and Stochastic indicators are signaling a retracement back to the $43 – $44 level, a previous support which now is starting to look like resistance.

You can clearly see that MACD is not enamored by the current rally in oil prices, and is pointing in a negative direction.

 

MACD Oil Prices

3. Umm yeah, let’s not forget this happened.

As a regular gym attendee (every morning at 6am) I can tell you that there is a certain amount of weight that you should be lifting to stimulate your muscles properly.  If you are curling dumb bells, 30 pounds is okay, 40 is better, 100 is outright intimidating (and badass).  But at the end of the day it is both healthy and safe for you to lift that weight.

But, if you have to lift a billion tonnes, you would never attempt it (not even with Arnold as your spotter).

So why bother trying to lift all this weight that the market has slammed down on us.  In 16 months, price has gone down from $108 to $38’ish.  That is what you call a STRONG trend, and one you do not want to fight with.  If the freight train is coming down the tracks, do yourself a favor and get out of its way. Please!

We really need closes above $50, $53 and $60 (with increasing volume) to buy the long oil story.  Until then, we are in a down trend.

Oil Price

 

4. Mathematicians are turning on you.

When Leonardo Bonacci (who died in 1,250 and was the famous man after who “fibonacci” was named) does not like you, or the framework of analysis he invented doesn’t like you, you should be curious.  Why?  Not because Leonardo will haunt you, but because any trader who is a profitable trader is a Fibonacci-using trader.

The first and second level were both hit, on low volume. The next level is the big one, the 50% retracement at $44.12.  This pivot is super important, if we close above with volume, we can see some more upside as high as $46.50.  If we fail at $44, we are moving lower!

 

Fibonacci Oil Price

 

Trade happy and happy trading!

 

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The information contained in this presentation is solely for educational purposes, and does not constitute investment advice.  The risk of trading in securities markets can be substantial.  You should carefully consider  if engaging in such activity is suitable to your own financial situation.  TRADEPRO Academy is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.