Oil opened lower on Wednesday and has extended its decline since, dropping for a second consecutive day. WTI is down more than 1% at time of writing, having retreated below the psychological $70 price level. Combined losses this week are nearly 3%.
Omicron is making traders increasingly jittery. While initial reports said the new variant had milder symptoms than those of COVID-19's Delta strain, the World Health Organization warned not to underestimate Omicron. The UK's top public health adviser, Dr. Susan Hopkins, warned the number of infections could reach as much as 1 million a day by the end of December. All which indicates to traders that demand could soon plummet.
The supply/demand balance on the technical chart echoes the current fundamental situation.
The price completed a rising flag, bearish after the preceding drop—and boy was it a drop. On Nov. 26 alone, the price plunged 12% on the fears of a global return to lockdowns. A rising flag after a sharp selloff happens not necessarily because of bullish interest, more frequently it occurs when short sellers exit positions.
Once whoever wanted out was out, demand dried up, leaving a predominance of supply.
The next move to be expected is a repeat of the activity preceding the flag, a more than $16 move from the breakout point, which was at $71.50. Therefore, according to current dynamics as well as the principles of technical analysis, we could expect the price of WTI to fall to $55.
If that happens, the following chart, offering a longer-term daily view, provides additional clues.
The price will complete a large H&S top, beginning in May, if the dip mentioned above occurs. However, even if oil does fall to $55, completing the oversized top, that doesn't mean it will play out immediately.
Even if it followed through with the flag's implied target, the price could bounce off the neckline at the low, into the mid $60s. However, if the price does fall below the neckline, completing this sizeable H&S top, we're looking at an even scarier implication.
The price could ultimately end up returning to $40. For now, however, let's just focus on the flag's move and expect to find support at WTI's trendline since mid-May.
Trading Strategies
Conservative traders should wait for the price to rally to retest the flag's integrity before risking a short position.
Moderate traders could wait for the same return move for a better entry, if not for confirmation.
Aggressive traders would short at will, provided they can withstand a whipsaw to the low $70s. Therefore, a coherent trade plan is crucial. Here's an example in order to help readers understand the basic requirements.
Trade Sample
- Entry: $70
- Stop-Loss: $72
- Risk: $2
- Target: $64
- Reward: $6
- Risk-Reward Ratio: 1:3