Crude Oil Breaks Trendline Support

July 16, 2008

Crude oil futures broke below trendline support today, which changes my bias to the short side. You can see the major divergence that was building on the MACD for several months. Divergence alone is not enough to take take a short position in a strong market like this. However, we now have a break of major support - the trendline. This is strong confirmation of divergence and a sell signal.

The question right now is whether this is a top in the market or a short-term turn. I don't know the answer. All I can say is that I want to trade from the short side until this market can get back above the trendline and hold it - or it establishes a new, secondary uptrend line.

Crude oil futures could easily have a quick washout if traders run for the exits. There should be strong support around the $123 level. If that fails, we could be headed to the $100 level. Normally there is a reaction back to the trendline after it is broken, which is a good shorting opportunity.

You can see natural gas futures broke down a few days ahead of crude oil. They paused for a breif period and then sold off hard again. You have to follow trades like this after a major break down. Sometimes you just get churned around in the volatility or you have false breakouts. But you will often catch a major move trading like this and that is what trading is all about.

To be successful at trading, you have to control your risk and take small loses when trades don't work out. There are times you will catch a really nice run if you are disciplined to stay in the trade and not take quick and small profits. The profits from extended moves are where the bulk of your trading profits come from for the year.

You can also view more of my updated comments on the commodities markets at Commodities.About.com.