Oil inventories and the classic volatility trap

oil chart 5 minuteEvery item of fundamental news, whether large or small, provides the big operators with the ideal opportunity to trap traders into weak positions, and yesterday’s oil inventories were no exception. But before moving to the longer term picture of the daily chart for oil, let’s start with the intraday price action of the 5 minute timeframe and the associated price action post release.

The market had been expecting a draw in oil inventories of 3.2million barrels, but when released the inventory figures were less than half this number at 1.5 million with the market duly reacting lower in the first few minutes following the release. However, as we can see on the chart, the candle formed also triggered a volatility signal, the classic precursor to a trap move, with traders stranded in weak positions to the short side, as the market duly reversed inside the spread of the candle, before reversing off the lows and continuing higher for the remainder of the session. The volatility trap is a classic one, and is associated with all news and data driven events, and once triggered, subsequent price action is then likely to revert into the spread of the candle, with today’s oil inventories providing an excellent example with many traders then forced to cover in panic as the market recovered.Indeed, at the time of writing, a second is now forming in the $49.60 per barrel area as the market pauses towards the end of the session with the price action once again reverting inside the spread of the candle.

Moving to the daily chart as always it is a question of whether it is the technical, fundamental or political aspect which is the primary driver. And if we start with the technical picture, the rally of late July was associated with narrow spread candles on flat and falling volumes, and suggesting weakness in the market which duly arrived on Tuesday as oil failed to breach strong resistance in the $50.50 per barrel area, and denoted with the red dotted line and falling sharply before recovering some of the losses in Tuesday’s session from the gapped down open.The volume point of control remains anchored in the $46.30 per barrel region, and should this short term ceiling of resistance hold firm, oil may retrace back to test this region once more in the short term.

Moving to the political picture, this continues to dominate, and despite all the rhetoric and agreements, supply still remains high, despite the modest fall in inventories yesterday. Indeed, overall, oil output rose in July to a high for the year and with both Libya and Iran increasing output and so dampening the effects of Russia who continue to support the supply agreements to date. This is against a perceived backdrop of oversupply generally rising once again both in the later half of 2017 and into 2018, and so continuing to contain and suppress oil prices in the short to medium term as new fields come on stream, and those countries outside the current supply agreements continue to ramp up production.

Finally to the fundamentals, and here it is the US dollar which is most pertinent, with the general weakness in the currency failing to have any noted positive impact on the price of oil, resultng in a general decoupling which has also been in evidence in other commodities.

By Anna Coulling

Charts from NinjaTrader

About Anna 1007 Articles
Hi – my name is Anna Coulling and I am a full time currency, commodities and equities trader. I have been involved in both trading and investing for over fifteen years and have traded many different financial instruments, from options and futures to stocks and commodities. I write and publish articles ( mostly for free ) for UK and international publications on a wide variety of financial issues, and in particular I enjoy helping others learn how to invest and trade.

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