Technical Analysis review. This week saw the end of the recent crude oil bull run, with a sell-off that matches that seen in the global stock markets.

Overview

Following recent strong gains, crude oil has had a tough week.  Crude oil prices lost around 5%, in conjunction with the major stock-market sell-off in the latter part of the week. Whilst last week everyone was talking about $100/barrel targets, this week some fear set in across the board, and oil traders seemed content with taking profits, rather than holding on to risk.

To add to the negative sentiment of the week, on Thursday there was some bearish news from the EIA which stated US Crude Oil inventories had a 5.987m surplus, versus an expected 2.620m barrels. Although, the week prior there were similar numbers, which had no impact on the bull run.

The Technicals

The chart below shows crude oil futures for the week, commencing Monday 8th October. The white and grey candlestick bars show the price of US crude oil (CLX8 – NYMEX). The lines surrounding it are the VWAP and its standard deviations.

The central pink line is the Volume Weighted Average Price (VWAP). Each of the lines either side are standard deviations away from the VWAP. So the blue lines are the first standard deviation away from the VWAP. The red is the furthest standard deviation above, and the green line is the furthest standard deviation below.

I like to use the VWAP with the SD bands, to give a framework to the week. There are many other indicators that can provide a similar framework. However the VWAP is my indicator of choice.

On the far right side of the chart is the volume-by-price. This shows how much volume was traded at each price level. A peak is high volume, and a valley is a a low volume area. Low volume areas can often indicate areas of support or resistance.

Technical Analysis. US Crude Oil futures chart of the week, w/c 8th October 2018

There are 4 arrows on the chart which mark key areas, and how I would have traded the week :

  1. The market started bullish on Monday, and was well above the pink VWAP going into Tuesday. A good trade opportunity would have been the test of the pink VWAP line late on Tuesday afternoon (UK time). You can see the market pulls bank to the pink VWAP line and bounces strongly back up to the top red band. Holding above the VWAP (pink) is a sign of a bullish market.
  2. On Wednesday, in conjunctions with the stock market sell-off, the crude oil price broke strongly through the pink VWAP. This is a sign that the bullish week was over, and there was a significant reversal occurring. It’s likely that would have caught many out who were bullish at the start of the week. However, once it broke so strongly it was a signal to hold short below the pink VWAP for the rest of the week.
  3. Indeed we did continue with the bearish price action on Thursday, after the break on Wednesday. It can be seen the market is holding below the lowest VWAP band (green) through Thursday. Every pullback was an opportunity to go short.
  4. On Friday it could be seen that the selling volume had declined and we were to remain in sideways action. There was not a lot to trade here, and if you had held onto short positions since the middle of the week, now was the time to close them before the weekend.

The year so far

On a longer term perspective, looking at the crude oil charts since the beginning of 2018.  The chart below shows US crude oil for the whole year, with the same VWAP bands as mentioned before. It can be seen on Thursday and Friday of last week, that the market bounces of the pink VWAP, perfectly. This is shown on the far right of the chart where the red arrow is pointing. It is clear to see that the pink VWAP has acted as support, and the market failed to break below at the end of last week.

This point could be pivotal next week, to determine if we remain above, or break below for a stronger downward move.

Technical Analysis. US crude oil chart showing the year as a whole.


All analysis and commentary is for educational use only and should never be used to make trading decisions, or any other actions. Always seek professional financial advice before making any investments. View our full Terms and conditions of use of this website.

About the author

Trading and Investment

Traded the markets for over 15 years, including Commodities, Bonds, Currencies, Equities, and Indices. I have also worked as a Chartered Financial Planner.
CeMAP, CeFA, DipFA, AdvDipFA, Ba(Hons) Economics, Chartered ALIBF

Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.