Reversal Trade: Crude Oil, Silver?

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In the absence of strong trends, the most success I have had in trading popular commodities such as crude oil and precious metals has been by waiting for the price to hit key horizontal levels which have acted as successful support and resistance when they were last reached, and waiting for a definite turn in the price signaling a reversal before entering a trade. I have recently taken successful trades using this method in Silver, Natural Gas, and Crude Oil. I have found it is important to draw the key levels and then wait very patiently for the price to get there before seriously considering whether to enter a new trade: trying to “find” a trade on the chart is a dangerous way to operate. Two possible trades I have been starting to consider are short WTI Crude Oil from a possible reversal at about $50, and short Silver from $16.83 which is also a key level. In the case of Crude Oil, $50 has the advantage of being a “psychological anchor”, and anyone looking at historical turning points for Crude Oil can see that big numbers such as $50, $75, $100 etc. have been more than coincidentally influential.

The problem with both trades is that the reversals are far from clear, and momentum has not slowed sufficiently yet. Looking at Silver, we have a large bearish outside candle, and the price has been unable to close above $16.83. These are encouraging signs, but we have had a new high within the past 24 hours. I would like to see a bullish pull back and another failure at or close to the $16.83 level before taking things to the next step.

XAGUSD

Turning to Crude Oil, the situation is a little more advanced in that we had the large bearish engulfing candle yesterday, and today we are experiencing, at least so far, a bullish retracement. This is good, but we are still some way from a verdict, as the bullish momentum has been strong here and probably needs some more time to turn around.

USOIL

The paired asset in both these potential trades is the U.S. Dollar, which has been in a long-term bearish trend. If this trend continues, it will probably be bad news for any short trades here, as we have a long USD component. What we really need is a reversal of this Dollar trend. As it happens, we may get such a reversal very soon, as Friday will bring a release of crucial Non-Farm Payrolls data. If the number comes strongly exceeding market expectations, we can expect the U.S. Dollar to advance against any assets beginning to weaken, so it is possible this event will be decisive in determining whether or not to enter.

Adam is a Forex trader who has worked within financial markets for over 12 years, including 6 years with Merrill Lynch. He is certified in Fund Management and Investment Management by the U.K. Chartered Institute for Securities & Investment.