Chart Of The Day: Oil Confirms Path Towards $60

WTI crude oil keeps struggling below $97, unable to recover the psychologically crucial price of $100. The commodity plunged a whopping 8.5% yesterday to the lowest since April, even touching levels unseen since February.

Rising inflation has forced the Fed to hit markets with the most significant interest rate increases in decades, weighing on economic expansion. A slowdown—not to mention a recession—should be very bearish for oil, as the commodity is heavily used in goods manufacturing, delivery, and infrastructure expansion.

To make matters worse, a COVID flare-up in China has fueled new lockdowns in the Asian country. As the world's second largest economy, the largest oil importer, and second largest (to the US) oil consumer, China's economic pause will drastically affect global demand.

While some analysts assert that recent selloffs are overdone, I think they're just getting started, based on my interpretation of the technical analysis.

After the obscene 18% plunge within seven sessions, the price has completed a bearish Rising Flag. After such a windfall, bears were winded and needed a breather. They began locking in profits, which reduced supply and increased demand, creating the Rising Flag.

The downside breakout was proof that the high demand was temporary. Once whoever wanted out left, bears rushed to find willing buyers as much as almost 12% lower. That also dragged back in early bears kicking themselves in the pants for selling in the first place, causing the second leg down.

The confirmed resistance (as highlighted in the above chart) is why I feel more confident that I should draw the bottom of the triangle as I've done. You may also want to draw a horizontal line (dotted red line). In such a case, that may provide support for the price, and the Ascending triangle (as opposed to a Symmetrical one) will have not yet been complete.

However, in addition to the many points of contact, including six touches of support, my rising line jives with the flag's support and confirms resistance at the end of a Return Move.

Finally, the Rising Flag's target is about $82.50, based on the preceding move's length. If the normal dynamics of a flag follow through, that will complete the more conservative approach to drawing the triangle's bottom line.

Moreover, that would form a Descending Triangle, inherently more bearish than a Symmetrical one, in which bulls are just as eager as bears. Based on its height from the breakout point, my proposed Symmetrical Triangle's implied target is about $64. However, if this is a Descending Triangle, its height suggests a $28 breakout from its $93 level, aiming at $71.

Trading Strategies

Conservative traders should wait for the more demanding breakout of the Descending variety of the triangle below $93. However, they should wait for a close below $90 and count at least three days, preferably including a weekend, in which the price remains below the pattern, to avoid a bear trap.

Moderate traders would rely on the more aggressive interpretation of a Symmetrical Triangle. However, they would reduce exposure by waiting for the price to retest the triangle.

Aggressive traders could enter a long contrarian position, counting that yesterday's plunge was overdone for a single day and that it would find support by the Mar., Apr. lows (bottom of the Descending Triangle version), by the Jul. 6 low, and by the bottom of the channel. Finally, even if they're wrong, they will risk little, as the price is close to support and much more to gain proportionately.

Trade Sample 1 - Aggressive Long Position

• Entry: $95
• Stop-Loss: $94
• Risk: $1
• Target: $100
• Reward: $5
• Risk-Reward Ratio: 1:5

Trade Sample 2 - Aggressive Short Position

• Entry: $104
• Stop-Loss: $106
• Risk: $2
• Target: $94
• Reward: $10
• Risk-Reward Ratio: 1:5

Disclaimer: The author currently does not own any of the securities mentioned in this article.