Since Christmas last year, crude oil (CL) price has been trending up nicely within an up channel from 73 to almost 96 at the peak on 14 February 2022. The recent bullish move in crude oil is also supported by the geopolitical tensions between Russia and Ukraine. However, the subtle tell-tale signs revealed in the characteristics of the price action may signal a looming correction in crude oil.
Wyckoff Analysis Method for Crude Oil Futures
The crux of using Wyckoff method is to detect changes along the way in order to determine if there is potential violation in the current trend. Take a look at the chart of the crude oil futures (CL) below:
In July and November 2021, crude oil price hit the overbought trendline (as annotated in blue) and started a correction ranged from 20%-26% (shown in red). In early February 2022, crude oil price has again hit the overbought line (served as a resistance) after a prolonged uptrend since December 2021.
Apart from hitting the overbought line, shortening of the thrust to the upside can be observed since January 2022. The progress to the upside in crude oil is getting shorter as annotated in those 3 blue arrows, suggests the up momentum is fading.
On 14 February 2022, there was a false breakout or up thrust as labelled by Wyckoff practitioners, followed by a break of the immediate up trendline since early this year.
The conditions of overbought in conjunction with exhaustion of the up momentum plus the false breakout and a break of the up trendline paint a bearish picture ahead for the crude oil price. A break below the recent swing low should confirm the bearish move. Refer to the Wyckoff method video to find out how to interpret the trading context with the volume to better anticipate market movement.
Crude Oil Price Prediction
Although the bearish conditions are manifested in crude oil, a break below 88.5 with an inability to rally up will only confirm the start of the down swing. The magnitude of the down move is largely dependent on the potential emerging of the supply.
Based on the chart above, the support levels for crude oil futures are 85, 80 and 75. It is essential to pay close attention to how the price interacts at the specific support level should a down move materialize.
Using the Point and Figure (P&F) chart for a price target projection, the downside price target for crude oil is 80, which coincides with the support level. Further price targets can be calculated once the first target has been achieved.
Using the past two corrections in crude oil as analogues, a 20% correction off the peak of 96 would translate to 76.8, which is also close to the support at 75. Despite many oils related stocks outperform the market for weeks or months, proper stock risk management is required in order to survive in the market.
Bear in mind that a correction in crude oil usually does not come as a straight line. Potential re-distribution (in smaller timeframe) is likely to be seen during the correction. When a down swing starts in crude oil, oil related stocks are likely to experience selling pressure and profit taking. Visit TradePrecise.com to get more market insights in email for free.
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