Last Friday was a game-changer for Crude Oil prices. Over the past nearly three months, crude crafted a diamond top formation - a pattern that fuses a broadening formation on the left and a symmetrical triangle to the right.
Over the last six months, crude prices had been met with aggressive demand, forming long lower candlestick wicks every time the 50-day moving average (DMA) was tested, which reinforced the uptrend. However, there has been quite a change of character in the trend as of recent. Our first sign occurred last week, where the slope of the 50 DMA had taken a different shape, transforming into a flat line from an upwards slant.
Our second cue was established on Friday, where quite the confluence of support was created: 50 DMA + Anchored VWAP from yearly highs + diamond top trendline support. This critical convergence was broken in Tuesday’s session.
Moving from price and structure to another trend indicator, a few confirmatory signals appear in the Directional Movement Index (DMI). First, a couple of crossovers surfaced between the +DM line and the -DM line, placing -DM in the driver’s seat. Second, the trough in the ADX (red line) is currently indicating a market that has become dormant or trendless but is about to accelerate in a trend direction. Notice the ADX line has started to curl upwards following five consecutive down days. This is a warning that now could be the start of a larger downtrend.
Shifting our focus back to that diamond top formation... Given all our bearish substantiating evidence, one may ask “where could price head from here?”
First, a trader would measure the widest part of the diamond, from highs to lows, equating to roughly $38. Next, a trader would subtract that value from the breakout point of the formation - $95 - $38 = $57. Of course, patterns and measured moves are never guaranteed, but that could be a long ride down.
*Not a recommendation.
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