Tactical Long in Weak Market

Show a 3rd grader this 240 minute chart of December crude oil and ask him/her if price is going up, down, or sideways, and I'll bet you will get the answer "down." It's not hard to see that crude has been falling since last August. In fact, it is down over 14% during the last 68 days. The best trades are in the direction of the dominant trend, but what to do if you're not in the short trade?

Wait for a perfect setup that meets your rules. Today, a 78.6% "Double Bottom" Fibonacci pattern had the perfect setup. Perfect enough, to force a long trade in this short market. Specifically, the setup was as follows:

A swing low was created around 6:30a (labeled X), price fell hard to that price, consolidated sideways, and then attempted to recover (labeled Y). The movement from X to Y was $0.50 and took 1 hour, 40 minutes. 

• This XY leg qualified as a valid swing since there was an acceptable window at both endpoints.

Price then fell fast and hard to the 78.6% retrace of XY, but did not go below. The drop of $0.39 took less than four minutes. At this moment, I waited for price to close above the eight SMA (purple line) and placed a "buy market" order. The initial target was 36 points with a risk of 9 points (better than 3:1 hurdle).

• The YA qualified because it stopped exactly at a Fibonacci ratio. It was fast and exact. Point B, the 113+ retrace of YA was above the 200 SMA (brown line), at the moment that point A was set.

A "perfect" 78.6% Double Bottom has an initial target at 113-127.2 retrace of the YA leg. It is then expected to retrace 38.2-61.8 percent to make the C point. The probability of the C point succeeding is increased if, when the B point is set, the 38.2 retrace back to A is greater than the 50 SMA (in the case of a long). That condition was met today. Therefore, there was no reason to exit the trade completely.

The expected destination of a 78.6 Double Bottom is the range defined by the 161.8 - 224 extension of the XY swing. You can see that this area overlapped the 78.6-88.7 retrace from the previous day's afternoon high. A good place for shorts to push price down, into the longer term trend.

A perfect long setup, that culminated in a handoff back to the shorts, with risk reward ratios of better than 3 to 1 and 6 to 1. Not bad for a counter-trend trade.