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Evidence Oil Could Turn, Soon

Picking bottoms is a dangerous game, and for short-term traders there is little reason to do it. Oil prices will rise at some point, and an actual rise is better evidence of a reversal than any theoretical statements made currently. That said, there are events occurring in oil futures (CL) that need to be noted.

Despite the continual bearish news on oil (increasing supply, slumping demand), oil is a traded commodity. It only drops if someone wants to sell. The price drop between mid-2014 (oil north of $100) and now (oil near $28) shows oil has had its fair share of sellers over the last 18 months.

Figure 1 shows the decline on a three year weekly chart. The downtrend remains in effect, with the March contract recently hitting a new low of $27.56 on January 20—a price not seen since 2003.

Figure 1. Crude Oil (CL) Continuous Weekly Chart

Notice the escalating volume. While it is noticeable on the futures, it is much more noticeable in the retail trader accessible United States Oil Fund (USO). Volume during the 2015 decline has dwarfed prior volume seen in the ETF, including the sharp rally and crash of 2008. The ETF traded more than 100 million shares on January 12 and 13, and while the price has drifted lower since then, that very well could be a volume climax which indicates the price bottom may not be far behind.

Figure 2. USO 10 Year Weekly Chart

In 2008 volume two times normal, over a period of several months, indicated the bottom and eventual rise in oil. Back then the volume peak occurred on February 6, and the price didn't bottom until February 18.

That pattern may be playing out now following the volume peak, with the price drifting a bit lower before rising. A potential bottom between January 20 and 29 is a possibility. USO has seen heavy volume in 2015, more than double the historic average, but that has doubled again during some weeks in 2016.

Why is that important? Oil is a traded market, and skyrocketing volume means lots of stragglers are getting involved on the short side of the trade. If oil starts to creep up, those massive amounts of short positions will be forced to cover (buy)...pushing the price up.

Oil will go back up, but when exactly that occurs is anyone's guess. There is no doubt though that most of the downside is done; a bit more downside is negligible compared to how far it has already fallen. Short term traders should wait for signs of strength before acting, but when those signs occur there could be a sharp rally due to the recent very heavy selling volume.

Historically, based on oil and other commodities such as gold and silver, the price bottom (or top) following a volume climax typically isn't touched again for years.

The author has no current positions in USO or CL.

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