Oil can be poised to rally from these levels

Remember when the kind of relentless drop we've seen for the past few days in equities, was the only story in oil for weeks on end? Then a little over a week ago, we identified that oil hit a low price that may have been an Elliott Wave fifth-wave completion out of a triangle. Meaning that it may have completed a low that's sufficiently significant to pave the way for a good rally. Since then, oil bounced up nicely, and then pulled back on somewhat less volume the past two trading days (Friday and today). So what now?

On the chart below, I've marked off the downsloping trendline that stopped oil's rise on Thursday last week. If oil is going to stage a classic trend-reversal rally, it should rise above and preferably close above the high of today (Monday). Doing that tomorrow (Tuesday) would be very good. Assuming that happens, it gives a good trading buy signal, with a stop-loss level nearby. The classic stop loss level would be slightly under the low in USO at 22.74, but I've had good results with placing it at the closer level of the low of the day preceding the trigger bar. In simpler terms, I'm talking about today's low of 23.53. Remember, this assumes that tomorrow it closes above today's high. If (when) buying on that trigger, oil "should" move nicely up (and if it fell under today's low of 23.53 in USO, that makes it much less likely that it proceeds with the rally). I've marked today's high with the first of 4 horizontal green lines.



If oil then continues to push above the downtrending line, as well as the second green horizontal line (at 27.68 in USO), then it "should" pick up momentum. Rising above the remaining two horizontal green lines would confirm that the rally has legs, and then our main Fibonacci target would be just about 48 in this USO chart. For a more conservative target, we can also use a range of 30.73 - 30.99 - 31.53.

Why not more aggressive targets? The big-picture, long-term chart work in oil has me thinking that we don't necessarily look forward to oil going to new all-time highs, frankly. The more prudent approach will be to look for corrective movements, using conservative Fibonacci-based targets, with a close eye on the indicators.

This reminds me, I will post some information at my trading education site, http://www.nobullnobearnobias.blogspot.com/, on ways to use the stochastics indicators to help signal entry and exit points as well as when to let a trade ride with trend. These are exactly the types of indicators we'll probably want to use for keeping an eye on an oil rally. Oh, and don't forget - this idea of a rally is currently premised on the idea that oil moves higher quickly, preferably tomorrow - so let's be sure to look for that. Meantime - as always, be careful out there, and happy trading!