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Oil: Potential Bottom and Swing Long Setup

Long-Term Elliott Wave Count

  • I am assuming that from the July 2008 Top Oil is unfolding a Zig Zag, therefore the wave (C), which is underway, will likely test the 2009 low and probably establish a lower low.
  • The wave (B) was established on August 3013 with a complex Double Zig Zag, hence following this scenario, we are now in the wave (III) of (C)
  • We have technical and sentiment reasons (Contrarian indicators) to consider probable that price has established a bottom. If this is the case (Bottom of the wave III) the next move should be a multi-month wave (IV) rebound.
  • The first resistance = potential target, in the monthly time frame, is located at 67.15 (Continuous future contract)

Monthly Crude Oil Chart
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In the weekly time frame we have technical evidence of a potential bottom (Capitulation) given by the last two weekly candlesticks: Black Marabozu followed by a Doji. This week price action of a gap down which has been closed is a signal of a potential selling exhaustion and reversal.

If the wave (III) is in place the first conjecture that we can make is that a wave (IV) should not exceed the length of the wave (II) therefore the potential rebound should be capped in the range of 74-75, which coincides with the 0.382 retracement. Hence theoretically we would have a 30% upside move.

Weekly Crude Oil Chart
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Short-Term Time Frame:

It seems probable that the lod of the assumed wave (III) has been established last Tuesday with a Doji. the following two candlesticks are suggesting accumulation (The upper tails are showing selling pressure but "late bears" have not been able to achieve a new lower low). Moreover Friday's candlestick could be the "Day 1" of ignition higher.

A bottom will be confirmed once the resistance at 59.30 is breached. It is probable that above 59,30 a huge short squeeze will propel price higher.

If we are in the initial stage of the assumed wave (IV) rebound bulls will have to reclaim the 0.618 retracement of the last down leg, which began on December 1.

As we can see in the daily chart of the February Contract above 59,30 we have three clear resistances with "white space" in between, hence once a resistance level is reclaimed the next one should be easily achieved. The most important one is R 1, which coincides with the 0.618 retracement and the 20 dma

Crude Oil Daily Chart
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Daily oscillators are extremely oversold. The RSI it is displaying a strong upward move. In the wave (IV) rebound scenario the RSI will have to breach the trend line resistance in force since June 2014 and the MACD will have to trigger a bullish signal cross.

Crude Oil Momentum Chart
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60 minute Time Frame:

We can see that there is a battle going on between bulls and bears with large swings in both directions.

So far we have a higher high and a higher low.

We could make the case that price is unfolding an initial Double Zig Zag. It is impossible to know if the second wave (A) is in place, in which case next Monday, we could have a shallow pullback in the range of the highlighted target box that would give a gratifying buying opportunity or if instead we have a gap up and go making more complex the chasing. Even if it is the latter scenario the correct one, taking into account the potential upside that can be achieved with a multi-month wave (IV rebound, the R/R remains appealing.

If we have pullback I will buy both the future for day trading and UCO (Ultra Long Crude Oil ETF) for the swing scenario. If instead we have a gap up and go I will buy only UCO.

Crude Oil 60-Minute Chart
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60 minute Oscillators are overbought, hence maybe with a little luck next Monday a pullback could be in the cards:

Crude Oil 60-Minute Momentum Chart
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Lastly courtesy of SentimTrader, they have created a sentiment index that can be used as a contrarian indicator, they argue that when the Optix Index drops below 30 investors are getting too pessimistic. More often than not it is when price establishes a bottom

Crude Oil Optix Chart


Conclusion:

In my humble opinion odds favor a tradable bottom that should last several weeks therefore I think that we have a good set up for a swing long.

In addition obviously the energy sector will be benefitted hence XLE, OIH and XOP should be monitored for a long entry. For those prone to risk taking ERX is the 3 x long Energy Sector ETF.

 

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