Despite all the volatility in the stock market, crude oil has been falling almost in a straight line, and a lot of people are unaware of this major sell-off in such a major commodity.
Let’s take two perspectives, focusing on divergences, of the entire rally phase and the current range breakout to the downside.
First, the volatility color chart of Crude Oil:
What we’re seeing is a volatility color bar change, based on Average True Range, and price as contained within a parallel trend channel from July 2009 until the present range breakdown.
Underneath, we see the ‘color’ 3/10 momentum oscillator as failing to confirm the rally phase – starting in October 2009 – as a lengthy negative “multi-swing” divergence formed to undercut the recent highs. Odds favored a reversal… and we certainly got it.
The current daily bar just flashed purple, which indicates that price has moved 6 times the daily average true range (ATR) from the recent continuous futures contract high at $92.00.
You can see the last two times the color bar turned purple in a similar situation – the January 2010 high and the October 2009 swing high. On both occasions, that bar marked the peak of the swing.
Keep in mind that the price of the continuous contract, as shown in TradeStation, will be different than historical prices due to the way the program handles the roll-over of futures each month.
For a pure price view, we can see a similar chart, just this time without the color bars:
The lesson is that multi-swing negative divergences as price continues to rally, when combined with a break of an established rising trendline, often results in a great short-sale set-up and a reversal in price, as shown above.
It’s not just recently – look back to March 2009 when price reversed off the multi-swing positive momentum divergence and then broke the declining trendline in April. That was a nice buy set-up/signal as well.
Divergences do matter – it’s just that we don’t know WHEN they will matter.
Corey Rosenbloom, CMT
Afraid to Trade.com
Follow Corey on Twitter: http://twitter.com/afraidtotrade
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