Crude Oil – Sell Set Up.

Against a background of sluggish demand growth, excess supply capacity and high world inventories, I have been on the lookout for potential technical setups providing a logical strategy framework for selling into the current oil rally.

Brent might now provide an opportunity.

Fundamentals

With commodity trading, it can pay to step back from the day to day stories and look at the overall demand and supply picture. This helps make more sense of each day’s news and its possible impacts.

The table below comes from the International Energy Agency (IEA). It shows quarterly demand for 2012 and the first quarter this year plus their forecasts for the remainder of the year.

Global demand has been pretty much flat lining since the beginning of last year. By the end of 2013, IEA forecasts world demand will average 90.6m barrels per day, an increase of just 0.8% over the year. The broad picture here is one of declining demand in OECD countries (e.g. Europe) offsetting increased demand elsewhere including China.

 

World Oil Demand

Source: IEA Oil Market Report.

This moderate demand profile is met by good supply capacity. Saudi Arabia, for example, is currently pumping around 9.2m barrels a day but is estimated to have capacity to increase this to 12.5m within 30 days. Inventories of oil stored above the ground have been rising. In the US they are at historically high levels.

In these situations commodity price rallies tend to be capped as owners of inventory look to offload stocks and producers keep on producing.

Current demand and supply is of course not the only driver in oil markets. Geopolitical supply risk and US dollar weakness can both have a major bullish impact. That’s what stop losses are for.

Daily Chart Setup

Brent has arrived at the potential resistance of its 50 day moving average.

It also looks positioned to complete an ABC or zigzag correction. If it makes a trend peak here it will be doing so at a Fibonacci cluster zone. This is the Gartley ABC setup.

The Fibonacci cluster shown on the chart below consists of:

  • A 61.8% retracement of the decline from “2” to “3” and
  • A projection that the rally from “b” to “c” will be the same size (100%) of the “3” to “a” rally.

Crude Oil - Brent 8 May 

Strategy

This strategy is based on the assumption that if a corrective rally ends here, there is a reasonable possibility of a new downtrend that will finish under the previous low at “3”.

The strategy also assumes that a trend peak at this Fibonacci cluster has a reasonable prospect of being the end of an ‘ABC” correction. We haven’t made a trend peak yet and we may not.

One approach to entry strategy would be to place a stop entry order someway under the low of yesterday’s candle. If this is hit, there will be a fair chance that yesterday’s candle will left as a trend peak.

The initial stop loss could be place just above yesterday’s high. If price moves above “C” it won’t be the end of the upward correction and so the strategy will have failed.

This sort of approach to the initial entry and stop loss is demonstrated in the Tracker Order ticket below.

Crude Oil Order Ticket

About Ric Spooner

Over 30 years market experience - professional trader, broker, director
This entry was posted in Commodity, Market, Trading and tagged , , , , , , . Bookmark the permalink.

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