Divergences & Three Push Pattern Reversal In Crude Oil (USO, OIL, DBO, UCO, DTO, SCO, OIH)
Corey Rosenbloom: Traders are still adjusting to the significant sell-offs this week in the commodity markets, including Crude Oil (NYSE:USO) which broke sharply today.
Let’s see the daily chart pattern leading to the sell-off and see a great reference example of the “Three Push” reversal pattern with “Triple Swing” Negative Divergences.
Crude Oil Futures (@CL) Daily:
First of all, these surprise moves tend to be frustrating to both sides – bears and bulls.
Bulls – obviously – because if they remained long through the sell-off, they are losing open profits or money (if on a short-term trade established from higher levels).
Bears – not so obviously – because if they weren’t already positioned, or positioned on the breakdown under the 20 or 50 day EMAs, it can be very difficult to put on a position because the think “Well, the moment I get short is the moment oil will reverse, given it’s down so much already.”
While nothing can predict the future 100% (including fundamentals), charts often provide subtle – or even not-so-subtle – clues about the future immediate direction (or likely swing) of price.
In this example, we had two major variables flashing a big “Caution” Sign in Crude Oil:
1. Lengthy Negative Momentum Divergence
2. “Three Push” Reversal Price Pattern
All else aside, I wanted to focus on these concepts.
Generally, a divergence is a simple “caution” signal, while a “Multi-swing” divergence is not only a strongly warning sign, but a potential “Expect a Reversal” sign.
The stronger/longer the divergence, the bigger the resolution in price once the divergence ‘kicks in.’
Beyond the negative momentum divergence, we had a classic (one of my favorites) “Three Push” Reversal Pattern that goes by many names: “Three Drives to a Top,” “Three Little Indians,” etc.
The logic is the same – after three roughly symmetrical “pushes” or swings to marginal (small) new price highs, and failure of buyers to push the market significantly higher, a reversal can develop as the buyers “stop pushing” price higher.
Beyond the divergence and pattern, we look to rising moving averages as guides for confirmation of the potential reversal in play.
As long as price stays above (continues to bounce-up off of) the rising 20 day EMA (green), all is well and the bearish signals are just caution signs.
However, a price breakdown under the 20 EMA allows for a ’scalp’ play to test the rising 50 day EMA, and any movement under the 50 EMA tends to “lock-in” or trigger the reversal bias (or at a minimum, the expectation for a much deeper retracement than we’ve seen in the prior down-swings).
In this way, concepts give way to trade entries at triggers, with the concepts being the divergences and “Three Push” pattern and the triggers being the breakdowns of rising EMAs or rising trendlines.
Of course, you can drop to a lower timeframe structure for better entries/stop-loss parameters based on the daily chart structure.
Anyway, while the down-move was volatile, the pathway ahead of the sharp sell-off was paved with divergences, a major bearish reversal pattern, and the 20 EMA breakdown ahead of today’s sharp move.
Related Tickers: United States Oil (NYSE:USO), iPath S&P GSCI Crude Oil (NYSE:OIL), PowerShares DB Oil (NYSE:DBO), ProShares Ultra DJ-UBS Crude (NYSE:UCO), PowerShares DB Crude Oil Dble (NYSE:DTO), ProShares UltraShort DJ-UBS (NYSE:SCO), Oil Services HOLDRs (NYSE:OIH).
My name is Corey Rosenbloom, CMT (Chartered Market Technician) trader, educator, analyst, and I am excited to share with you my experiences studying and trading the markets and to hear from you regarding your experiences, challenges, and frustrations, and successes. My goal is to create a community dedicated to reaching out to those who have been burned by the market or are anxious about risking their money to make money in the stock, options, or futures markets. Together, we can share strategies and learn how to overcome crippling fears that keep us from achieving our highest potential.