If you missed the first post, here is your second chance to read it. Let’s continue the discussion of convergence lines in context to the trend (since I am still fiddling around with getting the scans going at the moment). Take a look at this chart, which includes the two most recent lower highs prior to the last one on February 2, 2015 for CL #F (the continuous contract of NYMEX crude oil futures prices). That technique is something discussed in an old book (which is quite a good and foundational one about trend lines called “Techniques of a Professional Commodity Chart Analyst, by Arthur Sklarew” . Get it at Amazon, it will be one of the best pennies you have ever spent, particularly if you are a beginner at technical charting.) Mr. Sklarew died 20 years ago, but I think the book is a classic, particularly if you want to understand simple key charting concepts.
There are a few important things I want to point out here, as it looks like we still haven’t quite gotten the bullish case I described in the original post.
1) According to Skarlew’s book, to really get confirmation on a trend line (in this case, the orange line is a downtrend line), you need confirmation by having that line touch a high (and no more than that) 3 times. A good start toward finding one is to connect the previous two higher highs (in a downtrend line) or higher lows (in an uptrend line). If you do that, the odds can increase (based on experience I have had and not on a count provided by a neural net) that your odds of being right on the trend become roughly 7 out of 10, as long as the volume does not reverse on the original trend (which for now is down). The odds of a downtrend go even higher if there is an bearish engulfing candle just before or after a touch of that trend line. We did get close to a touch on the Friday, February 6 rally, but we did not get it. We also got a very modestly bullish candle. If that fails, then we might anticipate a coming bearish candle on volume that might confirm it. We don’t have confirmation as yet.
2) One thing you need to realize also is that if a trend line crosses and touches a Fibonacci retracement or extension level, if that bar does not cross that previous high or that Fibonacci level or trendline, you also have a very high likelihood of a reversal if selling volume confirms the bearish engulfing candle. That too is missing thus far.
The bottom line is this:
If we do not cross that trend line and we get a bearish engulfing pattern on strong selling volume, the odds are getting close to unity for at least a retest of the previous low around that 43.40 level, and that the price of NYMEX crude oil could fall into the $30s/barrel in the near future. It will require some watching, and I will try to keep this discussion going until there isn’t much to discuss.
In other news:
Still working on data issues. I have also noticed that you people stopped emailing me about suggestions for content. Make sure you send me an email to firstname.lastname@example.org and give me your suggestions. I am all ears.
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