Thanks for taking the time to read today's blog post where we discuss the importance of reversal patterns and how we can use sentiment to identify trend changes. These are great TA tools everyday market participants use to understand how to short, the justification for doing so and how to profit.
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Do you remember when everyone was talking nonstop about high oil prices!?
Yes, you probably even remember telling your family, taking to Twitter to scream about the outrageous prices you pay at the pump to Biden or seen some magic solution on how to extend the oil from your car from some random person on the internet.
Sentiment on the idea that the sky was falling and the fact that inflation was killing American purchasing power was sky high!
Instead of being upset, let's take a look at how we can profit off that sentiment during these situations we so often find ourselves in whether its the stock market rallying, high gas prices or that small cap stock that we are up 200% on!
Sentiment around high gas prices peaked in March of this year followed by a lower high in June just as expectations that gas prices were about to explode even higher. Meanwhile, my expectation is that inflation would start peaking in June as I pointed out to the Unusual Whales tweet stating "The worst of inflation is over, Congressional Budget Office says." Mostly it was a gut feeling and in addition to that we got the infamous magazine cover tell from Ryan Detrick which is a pretty good signal that tends to lag a couple of months.
I personally don't own a car anymore, as I try to be as Eco-friendly and am fortunate enough to live in a metropolis that provides sufficient access to subways and transportation. However, I can sympathize with those that do and when I started getting messages from my family in March it was apparent to me that gas price sentiment was probably about to hit a peak and therefore, it would be a great time to take profits on Crude Oil if we owned correlated assets (ETFs correlated to it - $USO, and the actual Commodity).
Fun fact! "According to the latest Energy Information Administration data, the cost of crude oil accounts for the majority (54%) of the retail price of regular gasoline. Refining makes up 18%, distribution and marketing 17%, and taxes 11%. Many gas stations are small businesses that are owned by individuals or families who only own one station and fewer than 5% are owned by refiners." This data is based on article written by Executive Vice President, Derrick Morgan, of the Heritage Foundation written on Sep 27, 2022.
So know that we know a little more about the oil that's actually in our gas, lets check out some charts to understand how we can profit from the rise and fall of oil!
Some might even say Gas Prices based off the chart of Crude Oil below actually peaked in March of this year (red trend line signaling a top) with Crude Oil making an attempt to break out of this range for five days in the beginning of.... wait for it... June! It makes sense too right, we got this small mini blow off top in Crude Oil in the beginning of March when consumers were fed up with gas stations raising prices (sentiment) and tried again in the beginning of June to break out and ultimately failed.
Ultimately, this tells us a couple of things:
A failure in price to make new highs means any new longs above $120 in Crude Oil this year were on the wrong side of the trade being too optimistic hoping price would reach all time highs in Crude Oil ($147 in 2008),
a failure in new highs meant demand for the commodity was peaking and anyone that shorted above $120 from March to June (which we did on the private feed -> @essex_trading) could place a stop above the March highs with confidence, and
the Federal Reserve was taking steps to wrangle its hold on run away inflation.
OK, great Miguel! Now what??
Well let's make some money, of course, by continuing with the path of least resistance!
You can see on the same chart above (indicated by the cyan line) that crude oil couldn't hold above the 200 SMA and if you've been a follower of our work we have talked about crucial this moving average is, especially to trend following strategies. That coupled with a failure to break last months high, $93.64, and break below $82 we've formed a an 'M' for Murder breakdown, which is just the opposite of the 'W' breakout. It's just the chart below, but inverted. In addition, price has confirmed a weekly bearish reversal for Crude Oil with a break below of the last week of October lows, the evidence continues to mount that we should be short crude oil and we are.
Lastly, I want to take a look at the $USO weekly chart. We found resistance at $89 which is exactly the last time we entered a distribution pattern in the United State Oil Fund which occurred right before the EPIC COVID crash in oil, which if your an Oil Trader you remember quite well!
A simple lesson here, previous support becomes resistance.
We've talked about distribution patterns in the past: a stock consolidates for a period of time in a range as it is met with supply and then breaks down further. These distribution patterns occur at tops in the markets where investors and traders start taking profits and therefore price has no option but to go down. We are seeing that occur on the weekly chart confirmed by our analysis above with Crude Oil along with a hidden divergence in relative strength (a negative for an asset, commodity, or cryptocurrency) along with a failure of the MACD to cross confirming a bullish thesis.
So, it's real simple let's continue to be short $USO if we break below and stay below $68, if you're interested in our long term targets, how we take advantage using options than considering subscribing to the private feed (@essex_trading). Since we are heading into black Friday we are offering 50% off. As always I am happy to answer questions you have on my public feed (@wizdaytrader) and appreciate the engagement!
Thanks for reading and remember to trade confidently!
Essex Trading Quote of the Day (#EsxQotD)
“The most entertaining outcome is the most likely – my variant on Occam’s Razor.”
~ Elon Musk
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