So far, crude oil is following our script.
On October 16, we made a three-stage forecast for the price of oil.
Stage 1 was a short-term rally from $84 to around $88. That’s exactly what happened just four days later.
Stage 2 was a sell-off in oil that would take prices to a minimum target around $77. As of writing, oil has dropped as low as $74.91.
Stage 3 is where we find ourselves now. I believe we’ll see prices rebound sharply, eventually taking out the September 28 highs of $95.
Before oil can rally, however, it must first find a true bottom. That hasn’t happened quite yet… and oil could fall even further before it stabilizes.
But at this stage of oil’s price cycle, the risk is starting to skew to the upside. That means oil likely has more room to trade higher than it does to continue selling off.
Whether oil finds support around $75 or $70 doesn’t change the last stage of my forecast. Oil is still likely to test $100 over the next several weeks.
From a technical perspective, the market is starting to show signs of life.
Check out the chart of oil below:
Oil has reached oversold conditions on the daily relative strength index (RSI) at the bottom of the chart. These oversold conditions happened as oil broke below the daily 200-moving average (MA).
Breaking below an important indicator like the 200-MA can be a bearish sign for a market.
But these indicators aren’t hard lines drawn in the sand. Trading below an indicator briefly, then popping back up above it happens all the time. With the benefit of hindsight, this is what traders call a head fake.
We may be looking at such a head fake in the making right now. Especially since the break below the 200-MA coincided with the RSI hitting oversold levels.
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If oil stabilizes back above the 200-MA, that would be a strong initial sign the bottom is in.
I’ll be on the lookout for additional clues that oil is continuing to stick to my script. A move back toward $100 from around current prices would make for an epic trade.
Happy trading.
Imre Gams
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