Will Oil Bounce Off Support? | A Lesson in Trade Set-ups

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By Jason McIntosh | Published 9 April 2022

I want to show you a set-up I’m seeing in the oil market. It’s a situation where a trader could potentially get a lot of upside for a relatively small risk. Even if you don’t trade oil, it’s a good example of asymmetric risk/reward.

Oil has had a huge move since the Covid lows, from below 0 to over 100. It’s been one of the great trends, as well as a very tradable trend.

Here’s a chart for the last 18 months:

You can see a nicely formed uptrend, followed by a spike higher during the invasion of Ukraine. A fast upwards thrust after a long advance often forms a blow-off top. Buying after such a move isn’t an asymmetric entry point. The price gets too stretched above its moving averages, and almost always falls back.

And that is what happened in oil. It’s come back to moving averages, had a bounce, and is now retesting support around $93.

Another interesting feature is the position of the Fibonacci retracement levels. The oil price has come back to the 50% retracement, so it’s a textbook move from a Fibonacci perspective.

Have a look at the chart:

You’ll see the Fibonacci levels in green. And what we can also do is include a support area (in blue). The support band picks up some previous highs and lows. There’s also support from the 100-day moving average. So, there’s a cluster of supports coming in.

Let’s talk about asymmetric risk-reward. This is more for the education of how these moves can play out. A trader could have a stop loss just below blue support band, say at $89. That’s about $10 below current levels. This means a relatively small risk.

But against that is a considerable potential upside. If the support holds, and prices bounces, they could potentially trade to a new high above $130.

Whether that happens, we don’t know. No one has a crystal ball. Successful trading isn’t about making predictions about what’s going to happen. It’s about identifying possibilities of what could happen, and then looking at the risk and reward dynamics of those setups.

Traders who play this type of set-up consistently tend to do well over time. Sure, there’ll be times when the support doesn’t hold and the price falls to the stop loss. A good trader will then take a relatively small loss and move on.

But there’ll be other times when the market bounces and the uptrend re-engages. That’s when a trader with the right strategies can make a lot of money.

This is an interesting set-up to keep an eye on. Let’s see whether the oil price bounces off the support band, or whether the price comes back for a more extended consolidation.

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Meet Jason

I'm Jason McIntosh, the creator of Motion Trader. My career began in 1991 on the trading floor at Bankers Trust. Nowadays, I trade my own systems from home in Sydney. 
Motion Trader is for investors who value robust analysis, data driven entry and exit signals, commentary, and education. I use engineered algorithms to identify when to buy and sell ASX stocks. No biases or guesswork, just data driven signals.