![\"Chart\"](\"https:\/\/cdn.jeffclarktrader.com\/JMU\/images\/202201\/20220112-jmu-01_xgb156.png\")
<\/div>\nThis price chart has three main pieces of evidence:<\/p>\n
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The key price reversal zone (red horizontal lines) between $74.77 and $79.42:<\/strong> This zone goes back to October 2011, where it first served as technical support<\/a>, keeping prices above the zone until the end of 2014.<\/p>\n<\/li>\n
Since then, the zone has flipped, serving as strong overhead resistance<\/a>, where it notably put a lid on the oil rally of 2018. Prices traded into the zone before ultimately collapsing into negative price territory in April 2020.<\/p>\n
Since July of 2021, oil bulls<\/a> have tried to take prices through the zone with limited success. If the current rally that started in December can’t break above the October 2021 high of $85.41, then it’s likely we’ll see a bearish<\/a> reversal in this market.<\/p>\n
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The potential head and shoulders pattern that may be taking shape:<\/strong> In October, prices ran into the key reversal zone before pulling back and going on to establish the 2021 high of $85.41.<\/p>\n<\/li>\n
Together, these two price movements have formed the left “shoulder” and “head” of a potential head and shoulders reversal pattern. If the next attempt to make a new high above $85.41 fails, then we’ll have a right “shoulder” in place.<\/p>\n
If prices can then break the neckline of this pattern – which is the trend line connecting the bases of the left and right shoulders – then the reversal pattern can be considered complete.<\/p>\n
What should follow next is a swift sell-off that may bring oil prices back to at least around $50.<\/p>\n
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The bearish RSI divergence (blue arrow<\/strong>):<\/strong> Bearish divergence occurs when prices make new highs, but a momentum indicator such as the Relative Strength Index (RSI)<\/a> begins to trend lower.<\/p>\n<\/li>\n
Divergence can often be a leading indicator for price action. The RSI indicates that momentum peaked as the left shoulder was being established.<\/p>\n
Take note of when oil pulled back and then rallied to $85.41, and the RSI declined dramatically despite oil prices being bid higher. This is a sign of technical weakness and could be a precursor to a dramatic sell-off.<\/p>\n
As you can see, the evidence so far is largely in favor of a sell-off in crude oil. The only thing that’s needed to confirm the bearish case is bearish price action.<\/p>\n<\/ol>\n
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