Oil is up more than 1 percent today, extending its rally into a fourth day with a total gain of 4.75 percent. This follows its consolidation since April 19.
Yesterday’s near 2 percent advance provided an upside breakout to a falling flag, bullish in an uptrend. The congestion within the pattern projects a pause after a sharp move that indicates investors may have been second-guessing themselves. The upside breakout dispels any such caution, as investor greed leads them right back in for another go.
The flag was also a return-move to retest a larger pattern, namely an ascending triangle, on January 25-April 15. The triangle ascends as does the demand, while the supply remains flat, like the triangle top. The test was successful, as evidenced by the upside breakout of a second bullish pattern.
On March 21 we forecast that the price of oil would head toward $70; we reiterated that projection on April 12, positing that the main fundamental driver has been rising Mideast tensions and the potential removal of 1 million barrels of Iranian oil a day from the global market. That fundamental driver has not slowed down but rather, is shifting into higher gear, as Saturday’s deadline approaches for President Donald Trump to decide whether to sign the waiver for Iranian sanctions or pull out of the deal entirely.
We are now upgrading our target to $75 -$77, the former as implied by the ascending triangle’s height and the latter as implied by the length of the flag pole, from the April 9, $61.93 low to the April 19, $69.56 high. A 12 percent move within nine sessions, in which there was only a single down-day more than qualifies as a flag pole.
Trading Strategies – Long Position Setup
Conservative traders would wait for a potential return move to retest the flag at the $69 area, with at least one long green candle engulfing the preceding red candle.
Moderate traders may wait for a return move for a better entry but not necessarily for proof of its support.
Aggressive traders may enter a long position now, providing they can afford a stop loss below the flag top or assume the risk.
Equity Management
Equity management is as important as analysis, if not more so. Successful traders enter positions only after they have established entry and exit points, as well as their risk-reward ratios. A minimum risk-reward ratio to ensure long-term success is 1:3. With this minimum ratio, traders increase their probability to cover losses, as well as incur profits.
Position 1
Entry: $69.01
Stop-Loss: $67.99 (Risk: $1.02)
Target: (Must be at least $3.06, to achieve 1:3 risk-reward) $73.99 (Reward: $4.00)
Risk-Reward Ratio: 4:1