I remain bearish on Crude Oil Futures. Again, the strategy I use is based on going with what I believe is the path of least resistance. I want to be trading in the direction of what I feel the daily trend is trading in. With that said, Crude Oil is showing no signs of reversing from a technical standpoint or even from a fundamental standpoint. The path of least resistance is to the downside.

The price drop picked up significantly into the fourth quarter of last year and we are currently at a 5 year low. OPEC has made it very clear they were not going to reduce production to help put a halt to this decline. Even if non-OPEC producer decide to reduce output it is said that OPEC wont reverse course. We could even see larger outputs from the Persian Gulf area if crude oil gets to $20 a barrel. After seeing prices below a significant psychological level of $50, picking a bottom could be costly. If you feel like you missed this move surely your not alone. Timing is everything when prices are moving swiftly and showing you a previous move using a Fibonacci strategy might help you gain confidence in jumping into a short position with the next move I see currently setting up.

Typically I look at what is termed a, traditional measured move. Using a Fib tool you would draw it on your chart in the direction of the trend from previous highs to new lows for a bearish sentiment. You would take a position at the 50% retracement (I like to see confluence as well), have stops beyond the 61.8% retracement and look to take profits at the -23.6% retracement. If prices trade through price targets with strength then with discretion you would apply what is termed an, extension Fib. With an Extension Fib you draw the tool using highs to new highs for a bullish trend or lows to new lows in a bearish trend. Right now I believe crude oil continues to trade in extensions based on previous extensions and I will show you why.

When looking at the next move I always go back and find the previous move that led me to draw the next one the way I do. I always try to provide this when writing these articles to help you get a better understanding of what I am doing and also to help show you the power I see in this strategy that led me to base a large majority of my levels off of. When looking back I have drawn the previous move as an, extension using the lows of 12/01 of $63.72 and drawing it downward to what would have been the newest lows on 12/16 of $53.6 before the price retraced into the 50% level. From there, taking a trade off of the 50% would have had your orders filled on 12/17 at $58.58. Using a stop just beyond the 61.8% or $59.77 would have given you a risk of just above $1,000 per contract. The market showed several opportunities to use this strategy for entries and trading into 12/19, a four hour 55 period moving average began to show additional confluence to the downside, while a Williams%R showed overbought levels which added additional conviction as well. Both the first target being the -23.6% and the -61.8% were hit for this particularly drawn move. See the chart below for a clear understanding:

Chart 1 (4 Hour)

I previously mentioned that I have already established based on price action showing strength beyond the first price target reaching new lows that I feel we are going to continue with extension fibs. With this idea in mind I draw from the previously used low on 12/16 or $53.6 to new lows on 1/07 or $46.83. With this drawn you can see we have already began to consolidate after reach the previous price targets as traders, in my mind, are taking profits. Seeing consolidation also leads me to think that if we break into the highs of last week some traders will be forced out with stops, giving the market an extra boost higher after a bear trap plays out. I have a feeling were not simply going to touch the next 50% but trade slightly higher and test the 61.8% where we begin to get confluence of the 55 period moving average again on the four hour chart. See the chart below for a clearer understanding:

Chart 2 (4 hour)

Look to establish a position around the 50% with a protective stop just beyond the 61.8%. Use consideration of your own risk management and if you need to be more conservative set your entry limit orders as high as you need to and sit on your hands until you get filled.

Methods of profit taking are also based on discretion. If you trade with one contract and you feel strongly about new lows look to see the -23.6% as a profit target. For a lager trader with multiple contracts (lets use 3 for example) I recommend taking profits right at a new low and trailing stops for the other two. Look to take profits at the -23.6%, while trailing stops on the last contract. While holding onto the final contract look to take profits at -61.8% or simply trail the market lower with a trailing stop. With a trailing stop you might be able to hold onto that last contract for a grand slam if we continue to move sharply lower as we have been.

Best of luck to your trading and as always, the Fibonacci strategy I used here provides very specific entry and exit points. It is possible to apply on all markets to help find higher probability trades. If you would like to discuss any of the following you can reach me at 888-272-6926 or e-mail at CWilkinson@longleaftrading.com. I look forward to speaking with you and assisting you with your trading objectives.

There is a substantial risk of loss in trading futures and options. Past performance is not indicative of future results. The information and data contained in this article was obtained from sources considered reliable. Their accuracy or completeness is not guaranteed. Information provided in this article is not to be deemed as an offer or solicitation with respect to the sale or purchase of any securities or commodities. Any decision to purchase or sell as a result of the opinions expressed in this article will be the full responsibility of the person authorizing such transaction.

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About the author

Chris Wilkinson is a Market Strategist at Long Leaf Trading Group. He got his start in trading as a proprietary trader, then as a broker and market analyst.

In his current role, Chris assists institutional and retail clients with their trading needs, from market advice and general trade strategy, to mentoring and education.

Chris has a developed a retracement trading system that provides directional bias in any type of market environment on any time frame. He provides his clients with this unique trading methodology as a full service brokerage provider through accounts set up at Long Leaf Trading Group.

If you would like to learn more about how Chris can help improve your trading he can be reached at Cwilkinson@longleaftrading.com or by phone at 888-272-6926.