The Forex Chronicles

Crude Oil Breakout From 4 May 2020

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Price Action

If you have been watching the price of oil in recent weeks and months, you will know that it has been on a crazy ride just recently.

Indeed there was a brief time when the oil price actually went negative when the latest contract expired, which was an unprecedented event that has never happened before.

The price had already tumbled as a result of tensions between Saudi Arabia and Russia, followed by the sharp drop-off in demand caused by global lockdowns, but the constant shorting of oil pushed the spot price of WTI Crude Oil down to just $7 per barrel.

Breakout

As countries have started to reopen for business, the price of WTI Crude has started to slowly rise again, and in this article I want to highlight a breakout that occurred last week that you may have missed.

WTI Crude Breakout - 4 May 2020

Inside bar breakouts are some of the most profitable breakouts you can trade if you wait for the right set-ups, and this was a decent example of a high probability set-up.

As you can see, there was initially a large red candle on 21 April 2020, but for the next ten trading sessions, the price of WTI Crude actually stayed within the entire range of this candle. So in other words, there were ten consecutive inside bars.

When this happens, there is often a strong breakout when the price finally breaks out of the range of this inside bar (and closes outside it), and that’s exactly what happened here.

On 4 May 2020, the price broke upwards out of this range and closed at almost exactly $23.

This would have been a good point to enter a long position because the price then went up to $27.15 the following day, representing a potential gain of $4.15.

Since then the price has dropped back to around the $25 mark, but I think many traders are expecting the momentum of this breakout to continue, with the price heading up towards the $30 level at some point.

Final Thoughts

I didn’t actually take this trade myself because I don’t like to trade oil on eToro (my risk score is high enough already thanks to my BP and RDSB stock holdings), but I just wanted to highlight how profitable these inside bar breakouts can be.

Just having two consecutive inside bars can be enough to give you a strong breakout trading opportunity, but it is often the case that your odds of success increase even more when you have several of these inside bars within the range of the initial candle.

That’s why I wanted to demonstrate with this example because here we had ten inside bar candles in a row, thanks to the extraordinarily large set-up candle that spooked the markets and prompted so many headlines.

It’s interesting to note that if you go back to the price chart and look at the price action before this large drop-off, you will see that there was a downward inside bar breakout just prior to this as well.

This would have got you into a short position at around $26.60, just before the big fall of nearly $20, but we can all be wise after the event, and in reality, many traders would probably have banked their profits before the price collapsed from $22 to $7.

The point is that you want to keep an eye out for these inside bar set-ups. They work really well on the longer time frames in particular, and when they occur at a peak or a trough, the resulting breakouts can potentially be large enough to give you some good gains.

Gold, Oil and Stock Markets All Looking Strong – February 2019

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Markets Summary

It has been very interesting to see how the markets have traded in the first few months of 2019, and I think it is fair to say that many people will have been surprised by just how high they have gone.

After crashing in November and December to panic-inducing lows, the Dow Jones has staged a remarkable turnaround, and is now just over 1000 points off its all time high at the time of writing.

Dow Jones Daily Chart - 19 February 2019

It wasn’t long ago that the Dow Jones was trading as low as 21,500, and everyone was predicting it would go much lower, but it is currently up to 25,890 and the strong upward trend is showing no signs that it is potentially coming to an end.

The same can be said for the FTSE 100. It was trading between 6600 and 6800 for quite a long time towards the end of last year, and some experts were predicting that it would fall to around 6000, but it is now trading above 7200, and could continue to edge higher throughout 2019.

Normally with such strong stock markets around the world, you might expect that the price of gold would have dropped because people naturally tend to sell some of their gold and invest the proceeds into stocks when the markets are rising. However this hasn’t happened at all, and the price of gold has actually risen strongly above the previous resistance level of $1300.

Finally, there is one other market that has risen strongly in recent weeks, and that’s the oil market. The price of both Brent crude and US crude oil has risen sharply, and they currently stand at $66.60 and $56.45 respectively.

Time To Short These Markets?

The question many traders are now asking themselves is; is this a good time to open short positions on some of these markets?

My own view is that all of these markets are now looking seriously overbought according to many different indicators, but that doesn’t necessarily mean that this is a good time to go short.

They were also looking overbought one week ago, and indeed two weeks ago, for example, but have still continued to move higher.

Closing Comments

The point I really want to get across is that trying to call the top of a strong rising market is a very dangerous game. Yes you may get lucky at times when all your technical indicators seem to suggest that it is set to reverse, but the price can easily continue to go higher and potentially take out your stop loss if you are not careful.

I myself have been wrong with some of my predictions on this blog because I thought the Dow Jones and US crude would both run into resistance and move lower, but the price of both of these markets just went straight through these resistance levels.

So it is often a much better strategy to find a strategy that trades in the same direction as the prevailing trend when the markets are rising so strongly. Of course these markets can’t keep on rising forever and there will eventually be a reversal, but trying to predict when this will occur is never easy.

Crude Oil’s Price Move Highlights Profitability of Inside Bar Breakouts

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Inside Bar Breakouts

I have long argued that inside bar breakouts are some of the easiest and most predictable breakouts that you can trade.

All you need to do is wait for quite a large candle on the daily chart (or higher), and wait for a series of consecutive inside bars that all trade within the range of this initial candle.

Then once the price eventually closes above or below the initial candle, you can then enter a trade in the same direction, and profit from the momentum of the breakout.

Real Life Example – US Crude Oil

To demonstrate the effectiveness of this simple trading strategy, here is the daily chart of US crude oil that I posted on this website at the start of the month:

US Crude Oil Inside Bars - 1 January 2019

….. and this is what happened when the price finally closed outside of the range of the initial set-up candle:

US Crude Oil Breakout - January 2019

As you can see, there was initially a false breakout where the price moved above but failed to close above the initial candle, followed by a secondary breakout where the price did indeed close above this candle, and this would have been the time to enter a long position.

Once this happened, the price moved strongly higher and went straight to $50, which would have been a natural exit price, but it actually had the momentum to keep on moving higher, and currently stands at around $52.

It could potentially go higher as well because it is still quite a long way below both the 100 and the 200-day moving averages, as shown on the chart above.

Final Thoughts

So hopefully you can see that you don’t necessarily need to use lots of fancy indicators to come up with a winning strategy.

The simplest strategies are often the most profitable, and I always found that inside bar breakouts in particular are generally some of the most predictable and profitable breakouts that you can trade.

The only real drawback is that they don’t occur all that often. So you may have to wait patiently for a really good set-up to occur across all of the major forex pairs and commodities. Alternatively you can apply this strategy to some of the other markets that you like to trade, such as cryptocurrencies or ETFs, for example.

US Crude Oil Update – 1 January 2019

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Previous Breakout

A few weeks ago I highlighted a possible breakout that was shaping up on the daily chart of US crude oil, and as it turned out, this would have been a very profitable trade:

US Crude Oil Breakout - December 2018

After breaking out of the previous trading range and closing below the lower trendline, the price went from around $49.50 to as low as $42.44 in a relatively short period of time.

Inside Bars

Since then, the price has recovered somewhat and is now trading around the $45 – $46 level, having moved relatively little during this quiet Christmas and New Year period.

However it is interesting to note that an inside bar formation has formed on this same daily chart, which suggests that there may be a possible breakout in the next few days.

US Crude Oil Inside Bars - 1 January 2019

What I am basically saying is that after the large bullish candle on 26 December 2018, there have been 3 consecutive inside bars / candles (4 if you include the Sunday session) that have all traded within the range of this particular candle.

Trading Opportunity

This is often a very good set-up if you are looking to trade breakouts because traders will often spot the same breakout themselves and pile into a position once the price closes above or below the initial set-up candle, helping it to become a self-fulfilling breakout for everyone.

In this case, an upward breakout is looking more likely simply because it is trading closer to the high of the initial candle, and we are long overdue a bounce as the price of oil dropped so much last year.

Therefore if the price closes above $47.08 in the coming days without closing too far above this level, this could be a good opportunity to open a long position.

$50 would be an obvious resistance level, so it might be a good idea to target an exit price just below $50, but if it could break through this level, then the price could potentially surge towards the 100 and 200-day EMAs, which are currently at $57.76 and $61.26 respectively.

I personally think the first outcome is more likely because I think it will struggle to break through the $50 at the current time.

If the price doesn’t close above the high of the initial candle and instead breaks below the low of this candle, and indeed the low of the previous candle a few days earlier, then this will really open up the downside.

This would see the price drop to around $42, and if it closed around this level, you could then expect the price to fall below $40 fairly easily.

However at the moment we just have to wait and see what happens. What I will say is that the longer the price trades within the range of the initial set-up candle, the stronger the breakout is likely to be.

As always, please note that these are just my own thoughts and opinions. This doesn’t represent professional trading or financial advice in any way.

Possible Breakout on US Crude Oil – December 2018

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Recent Price Action

The price of US crude oil has been trading in quite a narrow sideways trading range in recent times, and seems to have stabilized between $50 and $55 with no clear direction.

However if you draw some trendlines on the daily chart of this particular commodity, you can see that the range is getting smaller all the time, and therefore a breakout is becoming increasingly likely:

US Crude Oil Daily Chart - December 2018

Downward Breakout?

At the time of writing this article, the price has actually dipped below the lower trendline ever so slightly, hinting at a possible breakout, however it is still too early to call.

That’s because you really need to wait for the price to close decisively outside of an established trading range before trading breakouts.

So in this instance we will need to wait until the candle closes at the end of the trading session before seeing if this is an actual breakout or not.

I think it is fair to say that most traders are actually expecting the price of crude oil to bounce back rather than break lower because 89% of traders have long positions on eToro, and 87% of traders have long positions on IG Index, for example.

Therefore it will be interesting to see what happens in the coming hours and days.

Possible Price Targets

If the price does indeed break decisively below the lower trendline, then it could easily fall below $50 to around $48, and possibly as low as $45, although it is very hard to set any price targets with any real accuracy right now.

The fact that we are entering a quiet period of the year for the markets, ie Christmas and New Year, means that volumes are a lot lower, and as a result of this, price moves are harder to forecast because any price swings that occur can either be exaggerated or thwarted by low volumes.

I personally would be a lot more confident about trading an upward breakout because the price has already fallen quite substantially since the start of October. Therefore I would look for the price to close around the $53 level or higher before considering opening a long position, as so many traders are predicting.

However these are just my own thoughts and opinions. This in no way represents financial or trading advice of any kind.

I just thought I would alert you to a possible breakout that could be about to take place on US crude oil as we head into Christmas.