Chart Of The Day: Oil’s Expected Dead Cat Bounce

Oil is falling again today, on its third consecutive day of losses, but the slide isn't likely to last long — indeed the technicals are suggesting the price could be heading for a dead cat bounce.

This means the price of black gold could be set to rebound — despite plummeting earlier this week on news of Saudi’s quicker than expected repairs to their production facilities and yesterday's surprise U.S. announcement it would penalize Chinese tankers violating U.S. sanctions against Iran, which bounced futures off an uptrend line.

And of course, there's a larger question looming. How will this U.S. move against Chinese companies impact the fragile trade talks? The outlook for a slowdown amid the trade war paints a bleak picture for future demand pushing prices down earlier in the year.

However, the 12% drop from Monday’s $63.38 high to yesterday’s $55.55 low may have primed traders to increase demand. While contradictory fundamental messages may be obscuring a clear view, it's perhaps possible to better discern the supply/demand balance from the charts.

WTI Daily Chart

Oil contracts rebounded from yesterday’s lows, after nearing the uptrend line of the month. However, the price also closed off the session highs. The price pattern formed a high wave candle denoting more than just a lack of leadership, but actual fear. This candle appears after sharp moves and demonstrates its weakening.

Note that the price is stuck between the 50, 100 and 200 DMAs, which are intertwined like a taut coil, waiting to spring free, as in the breakout. Also, today’s price action bounced off its lows, showing that yesterday’s bears are backing off for the second day.

The RSI demonstrates that momentum is on the cusp between a continued uptrend and its end.

From a risk-reward ratio, a long position is preferred. However, of course, if the price falls, the direction would be more likely to change.

In the bottom line, after a 12% drop, some dip buyers are sure to come in, creating a dead cat bounce, which occurs when a security rises after an exaggerated fall.

Trade Strategies

Conservative traders would wait for a new high past the Sept. 16, $63.38, peak to prove the uptrend’s survival. Then they'd wait for a return move that would find support by the uptrend line.

Moderate traders may enter a long position after the uptrend line provides support now, with at least one long green candle. Then, they might wait for a return move.

Aggressive traders may risk a position now.

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