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Crude Oil Buying Opportunity


OpportunityThe last major buying opportunity in oil futures (CL) occurred in January and February.  After a strong rally that helps confirm a new longer-term uptrend is in place, the price has pulled back again, making August the month to take advantage of the next buying opportunity.

November crude oil advanced from 33.28 in January to 53.02 in June. The price pulled back after the high, hitting 39.96 on August 3. On first waves of new uptrends in oil, the pullback that follows is typically a 50% to 60% retracement of the advance. When the price hit 39.96, that was slightly more than a 66% retracement.  Following a slightly deeper pullback than average, the price is expected to rally back above 53.02...as uptrends make higher highs and higher lows.

As of August 8 the price is already running to the upside, which makes the entry a bit tricky. The original entry point was 41.71, which is when the first strong reversal signal--bullish engulfing pattern--occurred, indicating the pullback was over. That is still the ideal entry point, with a stop loss below 39.96. Getting that entry requires oil to pullback slightly from its current price of 43.48.

Figure 1. November Crude Oil, Daily Chart

Based on the ideal entry and stop loss, the risk is 1.75, or 175 ticks.  Even if the price only reaches 53, that's 11.29 (1129 ticks) of profit potential.  With a nearly 6.5:1 reward to risk, traders can afford to edge up their entry point if they feel so inclined. An entry at 43.25 provides almost a 3:1 reward to risk.  

53 is a very conservative target though. Based on the power of the first wave, the next wave higher is expected to take the price to 59.50 or above, greatly increasing the reward:risk on trades taken on this pullback.

There are no assurances oil will continue higher though. Historical tendencies are only tendencies, and that is why a stop loss is used to help control risk in the event the upside doesn't materialize.

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