We’ve witnessed absolute destruction in the price of crude oil and in other commodities in such a short period of time.  However, the situation might be changing and aggressive speculators might find a significant low-risk opportunity should crude oil find support at the well-established level of $40 per barrel.  Let’s see this and how it might play out into the near future.

Crude Oil Monthly:

A log-chart would show this better, but would also compress the most recent data and obscure the near vertical price rise (and inhibit the simple Elliott Wave Count) so be sure to view the $40 level from a log-chart in your own analysis.

Crude bumped the $40 level the first time in late 2000 and then oil fell as the economy went into recession (through the bear market of 2001-2002) before rising in early 2003 to challenge the $40 per barrel level yet again… only to find strong selling pressure there as well.

Crude finally broke above this significant barrier in mid-2004 and then the contract surged to new highs, doubling to $80 per barrel two years later. Price fell into an Elliott Wave 4 correction down to $50 per barrel in early 2007, only to rise rapidly (and almost unchecked), almost tripling in price to $144 earlier this year… only to plunge faster, further, and more devastatingly than the bumpy ride to the top.

Wall Street has a saying:  “Stocks (or commodities) take the escalator up and the elevator down.”  Look no further than crude to see this in action.

That being said, we just tested the $40 per barrel level and it appears we have found significant and strong support there - so much so that aggressive traders (or perhaps investors) could establish a solid buy position there with a stop around $38 per barrel or so to play for a large, possible upside target.  Swing traders would be even more apt to profit from an inflection point off this level - though do your own analysis before making any trading or investing decisions.

If you don’t trade futures, you might want to see if a key stock like Exxon-Mobil (XOM) or Chevron (CVX) is setting up a buy signal, or more appropriately, you could try to trade one of the oil ETFs such as DIG (ultra-oil and gas) or my preferred oil ETF, The US Oil Fund (USO).  Let’s look at its daily chart for a moment.

USO - US Oil Fund:

Who would want to buy such a hideous chart that has been in such a pervasive down-trend?  Is this appealing at all to a buyer?  Not really from a trend or ‘classic’ chart analysis perspective, but that’s why this could be considered appropriate for aggressive traders - because it goes against the grain of the well-heeled established downtrend.

However, there are bullish signs of possible life.  There is a multiple-swing positive momentum divergence forming as price continues to make new lows, which often precedes reversals - though a reversal is not guaranteed from that one indicator.

Second, we see a mini-hammer candlestick that formed on Friday’s trading (where the $40 per barrel oil was tested officially) which adds a little bullish fuel.  Generally, hammers alone aren’t enough reason to turn bullish, but taken in the context of a larger picture, they can add weight to an argument, particularly at expected reversal points off support.

Third, we see a major volume surge in the ETF, with the most recent surge going above 25 million shares.  Whether people (funds) are aggressively buying or aggressively shorting (or just bailing out of long positions) is unclear from this chart, and I’m not quite ready to call this ‘capitulation selling’ necessarily, but taken with other evidence, this could be a significant turn-around.

Continue to study the charts and crude oil for your own insights, but also realize that we could be experiencing a major or at least intermediate reversal off these levels.

Corey Rosenbloom
Afraid to Trade.com