From Nilay Guha at Trade with Precision:
The press is filled with reports on the drop of prices in oil and one would naturally be prompted into looking at short opportunities on this commodity. Let’s take a closer look at Brent Oil; a cursory glance at the monthly or weekly charts does in fact lead one to believe that this indeed may be the case. However, a closer look from a technical perspective causes a few red flags to be raised and calls for caution before jumping into short positions.
This therefore may be a good example of having trading rules and sticking by them. My trading rules call for the following:
- Are the moving averages especially the 10, 20, and 50 period moving averages in correct order (i.e. in a downtrend the 10 below the 20 and the 20 below the 50) with good separation between them?
- Have prices pulled into the sell zone (i.e. the area between and around the 10 and 20 period moving averages)?
- Has a small bearish candle formed in the sell zone which is the trigger for my entry?
- Do the higher timeframe charts confirm my readings?
- Are there any hurdles (by way if support and resistance) on the way to my target?
While the weekly chart is undoubtedly in a downtrend let us take a look at whether the other conditions are being met.
- Clearly the moving averages are in the correct order with good separation between them.
- Prices have been pulling into the zone creating good trading opportunities. However, such an opportunity does not seem to exist just at the moment with prices being marginally outside the sell zone (please see chart below).
- The latest candle on the weekly is undoubtedly bearish but is a bit too large for me to jump into a short position
- Price appears to be overextended on the monthly chart below meaning that there is a chance for price to rally back up to the declining moving averages
- Another key factor on this higher timeframe is that if you were to zoom out, you would notice a key level of support at $22.
Patience in trading can be a virtue, and this might be an example of one. I would therefore wait for a break below the long-term resistance level of $22 in addition to the other technical indicators lining up as per my trading rules before initiating a position notwithstanding the opinions aired in the financial press.