What Happens To Oil If Shorts Surrender

This week, we're going to focus on the technical chart pattern since the fundamentals have been beaten to death. By now we should all know that the world is oversupplied with oil and that a production "freeze" meeting is going to take place on April 17. But what if we get a surprise and OPEC and Non-OPEC countries decide to announce a significant reduction in output? Taking a look at the charts while we wait for the meeting to take place, we are envisioning the following scenarios.

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Technically, the main trend is still down according to our swing chart indicator for the May Crude Oil contract. However, this week's lower-low helped make $42.49 a new swing top. This is significant because the previous swing top was $51.63.

Taking out the swing top at $42.49 will turn the main trend to up. Since the week-ending November 6, short-sellers have kept their protective stops above $51.63. After this week, they will move their buy stops down from this level to just above the new swing top. Based on the current price of $38.58, we are now about $4.00 away from changing the main trend to up.

Short-sellers should heed this advice and not get so comfortable that you forget to move your buy stop orders. The move through $42.49 could trigger an acceleration to the upside that will cost you significantly if you don't use stops as protection.

Going into the new week, the nearest resistance is a price cluster formed by the major 50 percent level at $40.74 and the long-term uptrending angle at $40.85. Overcoming this area will signal the presence of buyers. Overtaking the long-term downtrending angle at $41.13 will mean the buying is getting stronger. This would set up the market for a rally into $42.49.

Taking out $42.49 will change the main trend to up on the weekly chart as I mentioned earlier. After running into Fibonacci resistance at $43.31, it will be off to the races if the upside momentum is strong enough to take out this level. The nearest resistance angle next week comes in at $46.38.

The new main range is $29.85 to $42.49. Its retracement zone at $36.17 to $34.68 is the primary downside target. An uptrending angle passes through this zone at $35.35, making it a valid target also next week.

Aggressive counter-trend buyers may come in on a test of the retracement zone since this area represents value. They are going to try to form a potentially bullish secondary higher bottom. If they are able to form a bottom then this could lead to the start of a rally.

The last rally was $29.85 to $42.49, or $12.64. If the market finds support at the 50 percent level at $36.17, for example, then the next rally could take us to $48.81.

The chart pattern suggests that the bullish pieces are beginning to fall into place. Bullish traders will have two options. The first option is to wait for the market to decline into the value zone at $36.17 to $34.68. It's not suggested that you step in and try to pick a bottom inside this zone, but to read the price action and order flow when it is tested. This will tell us if the buying is strong enough to support a rally.

If short, it is probably a good idea to start squaring positions inside the value zone so you don't get caught on the wrong side of a reversal to the upside.

If there is no pull-back into the value zone then we may have to consider buying strength. The first counter-trend buy will come in after the market takes out $41.13 convincingly. The second buy will come on a breakout over the swing top at $42.49. Finally, the third buying opportunity will be a move through the Fibonacci level at $43.31.

Any major buy signal will likely be accompanied by a news event. A simple change in the oil stocks report will not be enough to do this. It is probably going to be significant news from the production freeze meeting on April 17.

If the market is trading in the value zone when the bullish news comes out then look for a major reversal bottom to form, triggering an impressive short-covering rally.

If crude oil is not trading in the zone when the bullish news comes out then shorts will cover aggressively, and new buyers will come in. This should create enough upside momentum to take out $42.49 and change the trend to up.

In summary, we have identified two major areas that should attract buyers. We are going to let the market set the tone over the next few weeks. If everything lines up correctly, we'll either be buying value or strength.

Hopefully, since we are looking to get long, we'll get bullish news out of the production freeze meeting on April 17. The best scenario would be for this major news to come out when the market is trading in our value zone.