The gap, the pattern and the retracement. What does this combination tell us about the next move?
The beginning of the month encouraged the bulls to fight and brought them important technical improvements. What technical factors support them in that battle with their opponents? Is the way to the north open? Is there anything that could thwart buyers' plans? In today’s article, you’ll find answers to all these questions. Have a nice read.
Let’s start today’s analysis with the medium-term chart.
The first thing that catches the eye on the weekly chart is a pro-growth bullish engulfing pattern (marked with a green ellipse), which lured the buyers to the trading floor and encouraged them to fight for higher prices.
Thanks to their attack, stocks not only bounced off the 38.2% Fibonacci retracement but also closed the red gap formed in mid-Jan. and jumped above the 50-week moving average, invalidating the earlier breakdown.
This show of strength, in combination with buy signals re-generated by the CCI and the Stochastic Oscillator triggered further improvement and resulted in another upswinging the previous week, which closed the red gap formed in the previous month.
How did this northward movement affect the situation on the daily chart?
Before we check the answer to this question, let's recall the technical situation in the short term from the time of the last comment:
(…) the lower border of the green gap withstood the selling pressure, and three attempts to close it failed, which is the first positive sign that suggests the decline may be coming to an end.
Additionally, (…) this support area is also reinforced by the 78.6% Fibonacci retracement based on the entire Dec.-Jan. upward move, which increases the likelihood of pausing or even stopping further declines.
Where did this assumption come from?
(…) we must bear in mind the fact that during Monday's session, the upper border of the red declining trend channel (marked on the upper daily chart) was broken.
This is a positive sign, which suggests that the short-term trend could change in the very near future – especially when we factor in buy signals generated by the daily indicators and positive divergences between the weekly indicators (the CCI and the Stochastic Oscillator) and the price.
Additionally, the volume, which accompanied last week’s decline, was smaller than a week earlier (marked on the weekly chart), which suggests smaller involvement of the sellers in shaping the red candle, which may translate into reduced pressure during the upcoming sessions.
Is there anything else positive that bulls can use to their advantage?
Yes. Yesterday’s pullback could be a verification of Monday’s breakout above the upper line of the short-term red declining trend channel. If this is indeed the case and the bulls maintain their position, we should see an improvement in their situation on the daily chart quite quickly.
On top of that, there is also an orange consolidation on the lower daily chart, which suggests that the bulls can gather strength before attacking higher levels (…)
Form today’s point of view, we see that the combination of all the technical factors described above actually stopped further declines from deepening and encouraged buyers to act as expected.
On the same day as the last article was published, stocks opened the day with a green gap (137.36-138.84), which led to the closing of the red gap formed on Jan.17. Thanks to this price action a reversal island formation was formed on the chart, which translated into further improvement in the following days.
As you see, the following session also started with the green gap (140.27-140.88), which lured even more buyers to the trading floor and caused an upswing not only above the previously broken 50-day moving average but also above the upper line of the next red gap from Jan. 16.
Thanks to this move, the price also increased above the 200-day moving average and two pro-bearish candlestick formations (a reversal island formation from Jan.16 and bearish engulfing pattern from Jan.9) were neutralized, which gave the bulls even more reasons to attack higher levels.
Despite this improvement, the combination of the next red gap (formed on Jan.8) and the 61.8% Fibonacci retracement based on the entire Jan. declines) was strong enough to stop the march to the north and encourage the bears to act.
What happened? Not much as the previously formed green gap from Jan. 25 withstood the selling pressure and mobilized the bulls to defend this support. This show of strength caused another jump to the upside, and one more green gap (141.50-142.89) was formed last Friday.
Thanks to this move, stocks also closed the mentioned red gap from the beginning of the year and broke above the 61.8% Fibonacci retracement.
What next?
When we take a look at the chart below, we see that this week’s move to the upside took the price to the next resistance – the 78.6% Fibonacci retracement.
As a reminder, this important retracement (in combination with another technical factor) stopped further deterioration in the previous month, which suggests that it may also be strong enough to stop the bulls in the coming days.
Are there any other technical factors that can help to do this (just like in the past)?
Firstly, stocks approached a strong resistance area (created by the red gap from Dec.28 and reinforced by the bearish dark cloud cover formation from Jan.4), which managed to stop the bulls at the beginning of the year.
Secondly, the recent move to the upside, we can describe as a flag pattern, which has actually worked perfectly on stocks in recent days.
As you see, the size of the February move upward corresponded to the first part of the formation (both parts marked with blue dashed lines), achieving a minimum range of movement, which suggests that bulls may want to take profits in this area – especially when we factor in the above-mentioned strong resistances (the red gap and the 78.6% Fibonacci retracement).
Thirdly, the volume that accompanied yesterday’s candle (with a prolonged upper shadow) was visibly higher, which suggests that the bears may want to defend their allies.
Connecting the dots, even if the bulls try to go higher, the space for gains seems limited, and the probability of reversal and lower prices in the coming day(s) is likely.
If this is the case and stocks decline in the coming days, the first target for the sellers will be the space of the green gap (141.50-142.89) formed on Friday. In my opinion, only the closing of this important support can open the way for bears to lower levels (the Feb. 1 low of 139.77 and the next green supportive gap from Jan.24).
Summing up, on one hand, the beginning of the month encouraged the bulls to fight and brought them important technical improvements. On the other hand, however, they reached the resistance area, which in combination with the flag pattern (and its implications) could encourage the sellers to push the price lower and test the strength of the nearest support in the coming days.
If you’d like to know what the current technical picture of crude oil is or to find out what arguments the bulls have or what allies do the bears have, I encourage you to subscribe to Oil Trading Alerts, where you’ll find the answers to these (and many other) questions.
See you tomorrow.
Anna Radomska