Traders will often focus on the completion of a technical signal or a technical pattern in their analysis, as these events can mark the beginning of a new bullish or bearish move. But what happens when these signals and patterns fail?
We're seeing an excellent example of a failed pattern on the crude oil chart today, as the commodity is falling back below the uptrending neckline of the inverse head and shoulders bullish reversal pattern it completed on Friday, Feb. 1.
The break above the uptrending resistance level last Friday signaled the beginning of what could have been a new bullish move for oil that, based on the height of the pattern, would have had an initial price target of $65.50 ($54.50 breakout point + $11 pattern height = $65.50 target price). Unfortunately for oil bulls, the price of oil closed below the uptrending level that served as the neckline of the pattern, which invalidates the inverse head and shoulders.
It appears that commodity traders are viewing the move by the Organization of Petroleum Exporting Countries (OPEC) to reach out and form a loose union with Russia and other former Soviet republics as a confirmation that oil demand is not keeping up with oil production. After all, OPEC, Russia and these other countries wouldn't need to form a union of any kind to produce more oil – only to coordinate a production reduction.
This is all happening as Venezuelan oil tankers with approximately 7 million barrels of crude oil are stuck floating in the Gulf of Mexico with nowhere to go thanks to U.S. sanctions against Venezuelan oil.
Failed patterns have a high likelihood of moving in the opposite direction of the original breakout. There's no guarantee that this will happen for oil, but if the uptrending level that served as support for the left and right shoulders of the reversal pattern can't hold at $51.50, traders should watch for oil to retest its late-December 2018 lows.
Many new chart technicians mistakenly believe that the upper Bollinger® band is likely to serve as a resistance level during uptrends and the lower Bollinger® band is likely to serve as a support level during downtrends. The opposite is true.
When John Bollinger created his famous bands, he noted that the price of an asset riding along the upper band is a confirmation of bullish momentum, while the price of an asset riding along the lower band is a confirmation of bearish momentum.
Seeing the S&P 500 continuing to climb the upper band tells us that the market may have enough momentum to revisit its former resistance level at 2,820.
Risk Indicators – The VIX
The CBOE Volatility Index (VIX) dropped down and touched 15 today for the first time since Oct. 5, 2018. The VIX couldn't hold onto its intra-day lows, but this move shows that, halfway through the Q4 2018 earnings season, traders are starting to become more confident in the future of the U.S. stock market.
It was at the beginning of the Q3 2018 earnings season – which got under way last October – that the VIX first started to show signs of stress as traders wondered if corporate earnings were going to be strong enough to sustain the bearish impact of rising interest rates.
Fast forward to today, and traders are seeing companies continuing to beat earnings expectations at the same time that Treasury yields are falling as the Federal Open Market Committee (FOMC) slows its monetary tightening program.
At this rate, the VIX could be comfortably consolidating between support at 11.5 and resistance at 15, like it did from July through September 2018 – a period of steady gains for the S&P 500.
Bottom Line: Blue Skies Ahead
Whether you're looking at the charts of the major market indexes or the key risk indicators, you're seeing the same thing: bullish confirmation.
Wall Street has come a long way back from its December 2018 drop, and it appears that even with the uncertainty still facing the global economy, traders are committed to climbing the wall of worry.
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