Oil - Another Big Move in the Works?

Looking Back at what Oil has done
1) First and foremost, notice in the charts (below the text) how even after the strong sell off in oil futures the past month that it is still trading in its long term uptrend channel. So therefore in my mind the bull trend is still intact. Since the trend has lasted as long as it has, I would give the lower trendline 50 cents to $1 of leeway before confirming that it has broken. Sometimes, the TA genius Helene Meisler over at RealMoney.com calls this *using a fat pencil* to draw your trendlines. This is one of those times as you definitely do not want to trade yourself out of a good trend because of some noise. As with most thing regarding trading, use judgement here. Maybe let intra-day price movement do what they may, and only stop out of the trade if the close is below the *fat-pencil* trendline, or maybe say, I will stop myself out after 2 concecutive closes below the trendline. Just pick a *reasonable* plan before entering the trade and stick to it.

2) Everyone has been harping about how oil has crossed below its 200-day simple moving average and this signifies an even larger and swifter downtrend is likely in the works. Ahem, ahem. Last I checked on my chart, oil futures have dropped below their 200-day no fewer than 6 times in the past 2 years. What did oil do after each previous break of its 200-day? Well, it usually had some basing action for a couple days or a week then it was off to the races again for another strong bull move. See for yourself, I conveniently circled in orange on the charts (charts below this text) everytime it broke the 200day previously, and notice the strength immediately thereafter.

What's Next?
So what is next for oil? When trying to determine what side to trade oil (or anything for that matter), I usually like to see what traders have done in the past when trading oil when it was previously trading in the same context as it is at present. I already mentioned above that the 200day break on the downside is a non-event (as far as a reason to become bearish), and if anything, the trading back above the 200day when it has commenced the upward move has acted as a catalyst to the new uptrend (breakout buyers, short covering, moving average cross-over type traders, etc).

Analyzing the Current State of the Oil Chart

Become Best-friends with Mr. RSI
Here is an explanation of one of my favorite, and simple, strength indicators, that also serves as my overbought-oversold indicator: Wilder RSI with a lookback of 7. The standard approach is to use a lookback of 14, but I find that using a shorter lookback of only 7 gives a better indicator for imminent turning points in a market because there is less "smoothing" oriented with the shorter lookback. This less smoothing also makes it easier to see price-strength divergences (ie: RSI increasing, even if prices continue to go down--this is a bullish signal, signifying underlying buying strength). But besides looking at price-strength divergences, I also like to compare how overbought something is in the daily timeframe, and compare it with how overbought-oversold it is in the weekly timeframe. For example, if just the daily chart is really oversold (RSI<30)>50) then more selling could be in the works and that any shortterm bounces could just result in more selling. But, if both timeframes are equally oversold, both daily and and weekly RSI<30,>Applying Everything Above to the Current Oil Chart

The DAILY chart is oversold right now, but this is nothing really new. Look and how many other times RSI has gotten at or below the 30 level on the DAILY timeframe! But, if you match up many of these oversold points on the DAILY chart with the equivalent point on the WEEKLY chart, you'll see that many of the daily oversold readings DO NOT alost correspond to a WEEKLY oversold reading. I placed the daily chart above the weekly chart, below, for easy comparison. However, if you notice, that whenever the daily AND weekly chart are both oversold something significant is upon us. I've circled the oversold readings on the daily that also correspond with oversold readings on the weekly. Notice how each and everytime when RSI was oversold on BOTH the daily and weekly timeframe, oil traded much higher at some point 1 to 2 months in the future.

One trick that I should mention when reading the RSI on the weekly chart. If you are looking at a strongly trending market over a long time period (like oil) in the weekly timeframe, RSI will rarely get *officially* oversold where RSI<30,>How Much Risk is there in Going Long Here?
Well, like I just said, there isn't too much risk when going long if both daily and weekly RSI are oversold, but if I were to quantify it further, I would look at the most recent price action and attempt to see just how much lower oil might go before it turns. What I have shown in the 3rd chart are daily bars of the most recent price action. Usually when something sells off as hard as oil did from a recent high, it will sell off hard and furiously, take a break and retrace, then sell off hard and furiously again for about the same amount of time and price. As you can see in the chart, I have highlighted how oil is in the 2nd piece of its hard selloff and the 2nd selloff has almost gone down as far as the first selloff (7.5 points). If it goes the entire 7.5 points in this second selloff, it will get to 66. If you are a more conservative trader, maybe you wait to go long at 66. But if you are afraid of missing the bounce, maybe you just piece into a long position and go long 25% of whatever you want and buy a little more if it keeps going down into 66. Of course, again, remember to set stops accordingly.

More Reasons to Go Long
1) Also, as you can see in this chart, the 66 level in crude was the level of the last breakout, so this should act as strong support.

2) And, if you still need another reason to get long crude, look at the descending wedge I drew into the most recent price action chart. Most of the time this is a very bullish indicator IF and WHEN the upper trendline is broken. A conservative way to trade this would be to just enter long positions only if the uppertrendline is broken on a breakout--this will keep you from the whole "catching a falling knife" thing.

3) This one is just anecdotal at best: Jim Cramer, Wall Streets biggest oil bull for the past 3 years (definitely correctly!), has just in the past week turned bearish on oil, barring any exogenous act like terrorism, etc. Sometimes when the biggest bull turns bearish in the face of a huge selloff, is the best time to get bullish again-Jim should know this after the Trading Goddess bailed him out in 1998... (By the way, I have read that chapter in his book Confessions of a Street Addict countless times, because its one of the most motivational and inspirational things for me as a trader to know that even at the absolute worst of times, if you stick with it and keep fighting you can dig yourself out of a ditch and still win. Geesh, he was down 20% through October and ends up making it all back by end of the year and more in order to finish up profitable. Greatest comeback in history! But I digress...)

As you can see, the bullish picture has been painted. And as contrarian as it may sound right now, I think it is time to get long crude once again.


CHART 1: The Daily Chart...

CHART 2: The Weekly chart...

CHART 3: Daily Chart of Current Front Month Contract (October 06-CLV06)