Know Your Exits: Oil is Poised to Change

Crude oil is about to surprise a lot of people…

The energy trade has been one of the most consistent plays in the market over the last few months.

But my analysis is quite clear on the matter: start looking for an exit now.

Here’s what’s been going on in the oil markets…

Since June, the price for a barrel of crude oil has gotten a lot more expensive. Oil has traded from a low of about $67 to $92 over the last 100 days or so. That’s an increase of over 35%.

And as you might expect, such a move would start triggering overbought conditions in a number of technical indicators.

But overbought readings aren’t a reliable enough signal on their own. When tracking a potential reversal, you need to see many pieces of evidence all lining up.

That’s why we’re going to look at a chart of crude oil below. We’ll walk through three pieces of bearish evidence together.

First, we have an important resistance zone (red rectangle on the chart). This zone spans $91 to $94. The last time oil traded in this zone was November 2022. Crude ended up selling off over $30 per barrel before finding support in May 2023.

Take notice of how prices are currently approaching the zone.

The next piece of evidence is the resistance line (upper blue line) crude oil is approaching. Markets often trade within parallel channels. When prices approach the resistance line of such a channel, it can mark a potential reversal point.

This resistance line is quite compelling. That’s because it lines up perfectly with the red resistance zone.

The final piece of bearish evidence is the Relative Strength Index (RSI) on the bottom half of the chart. The RSI is flashing strong overbought signals, which occur over a reading of 70.

As mentioned earlier, an overbought reading isn’t too meaningful on its own. But overbought conditions combined with a market heading straight into heavy resistance is a classic formula for a powerful reversal.

If crude oil does reverse, keep an eye on the lower support line of the channel near $84. That’ll be the first major target for oil bears.

Back on September 6, readers were warned to take profits on a free trade recommendation to buy the Energy Select Sector ETF (XLE).

Since its September 6 high of $91.75, XLE has sold off as much 3%.

The cracks in the energy trade might be beginning to show. If oil ETFs continue their decline, then crude oil should also follow suit.

Traders should decide if they’re overexposed to the energy sector, and whether now is a good time to start taking profits.

Alternatively, if you’re on the more aggressive side of the spectrum, you could decide to directly play any downside that’s to come in oil.

Happy trading,

Imre Gams

Have you been watching oil changes?

Let us know your thoughts – and any questions you have – at [email protected].