Crude Oil futures are primed and ready for a major breakout opportunity, which could be worth three points in the near term, and as much as 13 points over the next five to ten weeks. Here are the levels to watch for what could become the next big Crude Oil gusher.
3-Day Narrow Range
Taking a look at the January 2014 contract of Crude Oil futures (CLF4) shows price has formed a very narrow 3-day range that spans just $1.06. To put this in perspective, Crude has averaged 3.02 points on a 3-day range basis lately. Typically speaking, when price range contracts this significantly from its average, a major breakout opportunity is usually ahead. As a matter of fact, when price finally begins to expand its range, you can usually bank on a move that is equal to its average range, and oftentimes as much as 25% greater than its average. What does this mean? It means once Crude gets a breakout from its current 3-day range, which spans from $97 to about $98.10, we could see a move of about 3.02 points in the direction of the breakout over the upcoming 3 to 5 sessions, and as much as 3.77 points, which is 25% greater than its average 3-day range. Keep an eye on $97 and $98.10 for signs of expansion this week, and also note any false breakouts or failed expansion at these levels, as this could be a big tell that price is headed the other way.
Watch the 95.70 zoneOnce Crude Oil failed to expand its range below the $93.20 support level at the end of November, it rallied through significant resistance at $95.70 and pushed to its current high of $98.07 without ever retesting its breakout point. If price does break the tight 3-day range to the downside at $97, we could see a big test in the $95.70 zone ahead. A successful retest of this zone could offer a significant buying opportunity for a move into the $100 range above.
This buy signal forecasts a move back to $110 resistanceFirst, let me say this: I'm not a blind signal trader. I think signals can be very dangerous for novice traders if they go about them the wrong way. I've seen traders blindly follow trading signals without ever understanding the firing mechanism behind them, which can be very costly to your bottom line. However, I am a firm believer in building automated signals according to your personal trading specifications that are in line with your trading plan, which can be a huge asset to your trading business. If you know why a signal has fired, and can confirm that the signal has fired during a market environment that supports the signal, they can be hugely beneficial for your trading. If nothing else, signals can be a great tool for bringing opportunities to your attention. Having said that, one of my favorite signals has fired a buy in Crude Oil in the weekly chart after last week's closing price of $97.65.
This particular buy signal has had a very high success rate over the last two years, with average moves of 10.02 points (11.6%) after the first five weeks in trade, and 13.12 points (15.2%) after ten weeks in trade for the three buy signals that have fired. There was a fourth signal that fired, but it occurred just four days after the third signal, so it was used as confirmation and therefore eliminated so as not to double-count the price move. Also, each move was measured using the maximum favorable excursion (MFE) after five weeks and ten weeks. Using last week's closing price of $97.65 and the above signal data, we can forecast price higher to $107.68 after the first five weeks in trade, and $110.77 after ten weeks in trade - on average. The fact that this signal has formed off a major lower trendline in the weekly chart adds powerful confirmation to the signal, as does the fact that the ten-week target of $110.77 coincides with major two-year resistance between $110 and $112. Keep in mind, however, these signals do not come without risk. The average maximum adverse excursion (MAE) of each signal was about 2.15 points (2.5%) from the entry of each signal. It's also important to note that regardless of statistics, each trade (or signal) always has a 50% chance of a being a winner or loser. As always, proper trade and risk management will be the key to trading these opportunities.