Crude Headed Lower Before it Goes Higher

By | August 24, 2016

The weekly chart of the Light Crude Oil — Continuous Contract ($WTIC) clearly illustrates the sharp decline in energy prices over the last two years after the support line of a long-term triangle pattern was breached in 2014. During the last 52 weeks, however, an inverse head-and-shoulders pattern has been forming below resistance at the $50 level, and a break and sustained move above this neckline resistance could see energy prices return back to the $75 area.

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A move of that magnitude is not likely any time soon, however. That’s because while prices have advanced higher this month and are retesting the neckline, a candle reversal pattern has formed at this key resistance level on the daily chart.

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The last time the inverse head-and-shoulders neckline was tested was in June, and at that time a bearish reversal pattern formed on the daily chart. Now, as it is retested once again, another reversal pattern has formed that suggests another pullback.

In June the neckline was penetrated on a closing basis by a large white candle, but that was followed the next day by a large dark candle of equal range. This two-day reversal combination is called a tweezer pattern and it saw price recede back below the neckline and continue lower before finding support at the 50% Fibonacci retracement level of the 2016 range. The rally this month has taken the contract price back to the weekly neckline, where recent price action has formed an evening-star pattern.

The evening star is a three-day bearish reversal formation that consists of a large white candle, followed by a narrow opening and closing range “doji” candle, and completed by a large dark candle. It represents a transition from bullishness to bearishness, and is a reliable indication when it forms at key technical levels.

The evening star suggests a potential pullback in energy prices before any potential breakout, with the first level of support the 50-day moving average, followed by the 38% retracement level.

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