To say that oil prices have been volatile over the last couple of weeks, is rather like saying the price of gold is a little weak at present, and as a result the price action in oil has left many analysts traders and commentators scratching around for answers and reasons. Possible reasons for the volatility have been many and varied, and have included every conceivable technical and fundamental influence, from the slowdown in China, to the depegging of the Yuan, to Russia and Venezuela and finally to OPEC themselves. However, for a clear view of the current situation, and perhaps more importantly a predictive view of what is likely to happen next, we need look no further than the slower timeframes for crude oil, and consider the volume price relationship on the monthly, weekly and daily charts. And if we begin with the monthly chart, it is last month’s price action which is seminal with August closing with a deep hammer candle which tested the low volume node of the VPOC at $37.75 per barrel, before recovering off this level to close at $49.20 per barrel. Whilst much of this recovery was witnessed over the last few days of the month, it is the context of the monthly price candle which sets the scene, associated as it is with ultra high volume, which is equivalent to that seen in February and which duly confirmed further weakness in this timeframe.
What is clear from last month, is that we have seen the first evidence of stopping volume arriving in this market which is clear for all to see, and a classic example of the volume price relationship in action. As always, this is the first signal and we can therefore expect to see further buying at this level in as the price action develops into a fully formed buying climax in due course. As such, we are likely to see oil prices consolidate in this region for some time, as the heavy selling momentum of the move lower is absorbed over an extended period of time in a classical way, with further buying by the big operators in before oil finally develops a longer term bullish trend. And given this phase of consolidation may last several months, from an intraday speculative perspective volume price analysis will provide traders a safe and secure guide as the market moves higher then lower as the buying climax develops.
Moving to the weekly chart, last week’s candle is again highly descriptive, with deep wick to the upper body coupled with ultra high volume telling its own story, and signalling a return of some bearish sentiment in this timeframe. Again we are likely to see oil consolidate in this region before moving lower, with further buying entering the market, as the consolidation phase of the buying climax builds.
And finally to the daily chart, and the key candle here was that of 31st August which triggered the second of the volatility indicators under extreme volume, with the price action of the remainder of the week then reverting inside the body of the candle with further weakness confirmed on Thursday on high volume.
In summary, for longer term oil speculators and investors, last month was the first signal of a slow down in the bearish trend for oil prices, with the potential for a bullish trend to develop longer term. For intraday oil speculators the sell button will not be quite so obvious over the next few months, and whilst there will continue to be days for shorting the commodity, bulls will also be back in evidence as the buying climax develops in this $10 per barrel range.
By Anna Coulling – charts from Quantum Trading and NinjaTrader