Here is another weekend post for you all. I am going to use this one to show you how I analyse the price chart of a commodity and explain why I am looking to enter a short position on US Oil next week.
I will go through my normal process of higher timeframe analysis to find my stronger directional bias and then move down to the lower 1hr timeframe to find a more accurate and better Reward:Risk entry. Let’s get to it!
As you will all probably know, I am a big fan of using a few key patterns when swing trading. I explain more about these in my swing trading guide which you can get on the Amazon book store. What we have on the weekly timeframe chart is a clear bearish wedge continuation pattern as marked on and when price broke the bottom trendline the price of US Oil proceeded to fall in value by over $25 per barrel! This was a big move and offered many opportunities for short traders to profit.
If we zoom in on the weekly timeframe chart (above) we can see that price has now bounced from the recent lows of $42.50 per barrel. I am of the opinion that this relatively bullish move is actually consolidation before price breaks to the downside again and completes its bearish move. Last weeks candle closed as a very bearish wick rejection of a key support zone at $60 which also coincides with the 50% price retracement level. In this zone we also have the weekly 50 EMA which is holding strong as a dynamic resistance keeping price down. These are 3 very important confluences that I use when swing trading and the 3 together should act as a strong resistance zone.
The daily timeframe chart shows a similar picture to the weekly chart shown above but the current bullish move clearly shows as a wedge pattern consolidation similar to the pattern that occurred on the weekly timeframe from 2016 to mid 2018. The main thing I have noted from the daily timeframe is Fridays very bearish engulfing candle and the previous days wick rejection of $60 per barrel zone. These are 2 more confluences that are giving me confidence to enter a short position.
In terms of entering short, I could have simply gone based purely off the weekly timeframe but this would not produce the kind of Reward:Risk ratio that I want to achieve. Instead, I prefer to look at a lower timeframe to get a more accurate entry for my short position to increase profitability.
The 1 hour timeframe chart is shown above and this is where the magic happens. If you are looking to increase the overall profitability of your trading then the simplest way is to reduce risk and increase the reward of your positions. In regards to US Oil, I have seen that price has broke a simple 2 touch bullish trendline and more importantly, a lower low has been made on Friday. This means that there is a high chance of the 1hr bullish trend reversing and becoming bearish.
Price also broke through the 1hr 50 EMA last week which has been acting as a very reliable dynamic support over the past few weeks. This 50 EMA can now be used as a dynamic support if it holds price down upon the next retest.
What I am looking for now if price to form a lower high for a short trade entry. I want price to pullback to the 1hr 50 EMA and retest and reject the daily pivot level so I can enter a short position with confidence that these trading indicators will act as a solid resistance. I have marked this predicted reaction on the chart above.
By waiting for a lower high before entering, I can then have a smaller stop loss if I am going to place my SL conservatively above previous highs. A smaller stop loss means I can short a greater number of Oil contracts and therefore return larger profit as the trade goes on.
As always… all my analysis is done on the fantastic TradingView platform which can be found by clicking here.
Thanks for reading and I hope you all have another successful trading week!
DISCLAIMER: None of the information posted on this site is to be considered investment/financial advice. Trading is high risk and you should only trade with money you can afford to lose.