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Structuring A Trade For The Top Of The Channel

Oil

For any trader, a perfect and clear chart pattern is a wonderful thing to behold. Even those like me who understand that technical and chart analysis has its limitations and will always be overpowered by shifts in fundamental factors finds it difficult to resist the obvious trade in such circumstances. The chart for WTI futures right now shows just such a pattern. In fact, the setup is so perfect that even that obvious trade can be structured in such a way as to guard against the possibility of being wrong.

(Click to enlarge)

I am sure that even if I hadn’t added the trend lines to the above chart, most of you would immediately spot the downward sloping channel in QM, the E-Mini WTI futures contract. Since the end of April oil has exhibited volatility, but in a pattern of lower highs and lower lows that is text book perfect.

The obvious trade now that we are right at the top of that channel is to sell. Even if we don’t continue the pattern and drop to the lower trend line, a retracement back to the next support level at around $45.50 would offer a very nice profit. The problem is that, as is usually the case, there are very good reasons for WTI being at the top of the range.

The two main bullish influences are global growth and OPEC. The strong rally in stocks around the world over the last few months has opened up the possibility of increased oil demand, which would take care of the glut of oil that has kept prices relatively depressed.…

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