The crude oil selloff is probably a bear leg in a developing trading range, writes Al Brooks

The crude oil futures market sold off strongly for two months. However, that selloff is probably only a bear leg in a developing trading range between $50 and $60. Crude should begin a rally up to $60 within the next two weeks.

The crude oil futures market triggered a minor buy signal on the weekly chart last week by going above the previous week’s high. Last week was a bull doji reversal bar after a two-week sell climax. The selloff was in a three-year trading range and it tested the support of the January low (see chart).

crude oil weekly chart

In addition, it was the second leg down from the April high. A strong second leg down in a trading range is often a second-leg Bear Trap. It can be simply a sell vacuum test of support that reverses back up.

If so, it traps bears into a bad short. They are assuming that the selloff is a breakout and will have at least one more leg down. But under the current circumstances, a second-leg Bear Trap is more likely.

There might be a two- to three-week new low below $50, but the odds favor a rally back up to the top of the most recent sell climax over the next one to two months. That is the May 30 high just below $60.

I have been saying since October that the huge selloff might test the June 2017 low, but then lead to a trading range that could last a year. That is still what is most likely.

Traders are now deciding if this past week will form a micro double bottom with the prior week and then rally to $60. The other option is another week or two of selling and then begin a month-long rally to around $60. Less likely is a continued selloff back to the December low of $43.59.

 

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