Pro-declining scenarios, price action and… their consequences for market participants. What's next?

Since the beginning of the month, the price of many oil stocks has turned south, realizing pro-downward scenarios. What are their consequences in the case of Conoco Phillips (COP), BP, and Chevron Corporation (CVX)? In today's article, we will take a closer look at the price action that took place and look for clues as to the direction of the next move. Have a nice read!

Conoco Phillips – Bearish Engulfing Pattern and Its Implications

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Let’s start today’s analysis with the quote from the last commentary on Conoco Phillips posted on Jan.5:

The first thing that catches the eye on the above chart is a huge red candlestick formed during yesterday’s session on higher volume (compared to earlier candles), which, in combination with the earlier white candle, created a pro-declining bearish engulfing pattern.

This is a strong bearish formation, which usually is enough to stop further improvement and encourage the sellers to act (you could read about its disastrous effect for bulls in an article on copper published on Dec.29, 2023) – especially if it is formed in the resistance area.

(…) Yup, yesterday’s red candle broke temporarily above the 61.8% Fibonacci retracement (based on the entire October-December downward move), but then reversed and declined, invalidating the earlier breakout. (…)

Additionally, when we take a closer look at the chart, we can notice negative divergences between all indicators and the price, which doesn’t bode well for the bulls – especially when we factor in the sell signals generated by the CCI and the Stochastic Oscillator.

On top of that, there is one more disturbing sign that speaks in favor of the bear.

What do I mean by writing that?

Just look at the RSI behavior (I marked both similar situations with orange rectangles).

At the beginning of September, the indicator moved to its overbought area, then generated a sell signal, which translated into lower prices of the stocks. After a rebound, it moved higher once again, but the negative divergence occurred (stocks hit a fresh high, but we didn’t see a fresh high in the RSI reading), which preceded a bigger move to the downside.

We can observe a very similar situation now: on Dec. 26 stocks hit high of 119.43 and then corrected earlier move. After that pullback, the price increased to a fresh high, but the RSI didn’t do the same. Yup, another negative divergence appeared, which suggests that since history repeats itself, further declines may be just around the corner – especially when we take into account all the earlier mentioned technical factors.

How low could the price go?

If the supports mentioned below the weekly chart fail, it seems that the closest solid short-term support (based on the daily chart) may be around 111.85-112.95, where the big green gap created on Dec. 14 is. Additionally, this is the last stop before the test of the December lows.

From today’s point of view, we see that the situation developed in tune with the above scenario, and oil bears implemented a pro-declining plan in the following days.

Thanks to their attack, the price moved quite sharply to the first downside target (as expected), but as you see, the buyers were unable to defend it, which resulted in closing the gap. In this way, the bulls lost their important ally, which suggested that it was only a matter of time before the declines deepened. We didn't have to wait long for the effects.

On Jan. 12 the buyers tried to push the price above the upper border of this gap, but they failed, which accelerated the downward move during yesterday’s session. Thanks to this drop, the stocks not only slipped to the next downside target (which I wrote about at the beginning of the month), but also hit a fresh multi-month low of 108.34.

What’s next?

Let’s take a look at the daily chart once again, but this time from a bit broader perspective.

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As you see, the recent downward move took the price to the next support area based on another green gap (107.92-108.92) created on Jul.20, 2023, which seems to be the last stop before a potential test of the 61.8% Fibonacci retracement based on the entire May-October upward move.

Will it withstand the selling pressure?

Time will tell. But before we find out about this, let's check if the bulls have any arguments to fight (apart from the supporting space of the mentioned gap). Well, it's very hard to see them. The only ally seems to be the position of the indicators at the moment. As you see the CCI and the Stochastic Oscillator dropped to their oversold areas, which suggests that we could see a buy signals in the coming days, but, in my opinion, it’s not enough to stop the sellers – especially when we factor in increased volume during yesterday’s session, a breakdown under the 200-day moving average and the breakdown under green solid support zone based on the previous lows and the 50% Fibonacci retracement, which support pro-declining scenario.

Nevertheless, there is one thing which is worth commenting on when discussing indicators.

What do I mean?

The behavior of the RSI. When we take a closer look at the chart, we see that it dropped to its lowest level since the beginning of December. What happened back then? It preceded the bottom – just like it did at the beginning of October (I marked all situations with green vertical lines). Therefore, in my opinion, it’s worth keeping an eye on it, because it can give us important clue for the future. If we see the bulls’ strength in the coming days and the green gap withstood the selling pressure plus the RSI shows, for example, a positive divergence, it could translate into a reversal in the following day(s).

Until this time, the bears have more reasons to act and a test of the lower border of the mentioned gap should not surprise us in the coming day(s).

Summing up, the sellers have shown great strength and determination since the beginning of the month, which resulted in closing an important price gap and breaking important supports, which ultimately led to the formation of a new multi-month low during yesterday's session. Thanks to this price action, the price slipped to another support, which is the last stop before the test of the strength of the 61.8% Fibonacci retracement. Therefore, the outcome of the battle here will show where the stocks hit next.

BP – The Breakdown and Its Consequences

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In the last article on BP posted on Jan.8, you could read the following:

Looking at the daily chart, we see that (…) a big red candle was formed on Jan.4, which together with a white candle in front of it created a dark cloud cover bearish reversal candlestick pattern. Additionally, the mentioned red candle invalidated the earlier small breakout above the green rising resistance line (based on the previous peaks), which is also the upper border of the green rising wedge, increasing the probability of further deterioration in the coming days.

This scenario is also reinforced by the current position of the daily indicators: the CCI remains in its overbought area, signaling that a sell signal may be just around the corner, while the Stochastic Oscillator generated already a sell signal, encouraging the sellers.

On top of that, (…) the bulls tried to push the price higher on Friday, but they failed, which, combined with earlier pro-declining technical factors, suggests that we’ll likely see at least a test of the lower border of the green rising wedge in the coming week (currently at around 35.66).

(…) Nevertheless, taking into account a potential breakdown under the lower border of the green rising wedge, the minimal size of the downward move could result even in a test of the mid-Dec. low of 34.25. (…)

From today’s point of view, we see that on the same day the article was published, BP opened the session well below the lower border of the rising wedge, which gave a green light for the bears to launch the pro-downward scenario that I wrote about.

In the following days, from session to session, the price falls lower and lower only to perfectly implement the pro-downward scenario and reach the target based on the range of the described formation.

Thanks to this decline, oil bears hit a fresh multi-month low, which doesn’t bode well for the price – especially when we factor in the fact that they gain another ally at the beginning of yesterday’s session– the red gap (34.60-34.86), which serves as the nearest resistance.

Nevertheless, when we take a closer look at the chart below (yup, once again the daily chart, but from a broader perspective), we can see that the space for further declines may be limited as not far from current levels, the bulls may find support.

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What do I mean?

From this perspective, we see that quite close to yesterday’s low, there is a red dashed declining line, which is a lower border of the red declining channel, which could encourage the buyers to trigger a rebound in the near future.

This scenario is also reinforced by the fact that the bears realized the pro-declining scenario described in the last article on BP, which suggests that they may be satisfied with the gains they have made and refrain from further strong attacks.

Additionally, the current position of the indicators suggests that higher prices may be just around the corner as the CCI remains in its oversold area, while the Stochastic Oscillator generated a buy signal. At this point, it is worth noting that such low readings of the indicators we saw at the beginning of November.

What did this lead to in the following sessions?

Yes, such low readings preceded the reversal, which suggests that similar price action may be just around the corner. However, before this happens, the bulls will have to show strength and prove that they are ready to fight for higher levels.

In my opinion, the best confirmation would be a pro-growth candlestick pattern, a significantly higher volume during the formation of the white candle, and the best proof of their determination would be the closure of the red gap formed during yesterday's session.

Summing up, the bears realized the pro-declining scenario, which in combination with the current position of the indicators, suggests that the space for declines may be limited (by the lower line of the red declining channel) and we could see a rebound in the coming days.

Chevron Corporation – The Channel

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Shifting our focus to Chevron Corporation, in my last article on CVX posted on Jan.9, you could read the following:

(…) the price moved sharply lower, reaching our downside target - the previously broken upper border of the blue rising trend channel during yesterday’s session.

What’s next?

On the one hand, the above-mentioned line (which serves as the nearest support) encouraged the bulls to fight, which resulted in a rebound. On the other hand, however, yesterday’s session started with another red gap (148.42-150.40), which, in combination with the sell signals generated by the indicators, doesn’t bode well for further improvement.

Therefore, if the bulls do not manage to break above this resistance and close the gap, it seems that the sellers may want to try their strength and willingness to defend yesterday's support. If (…) the bulls fail here, the way to around 145.60-145.98 (where the 61.8% Fibonacci retracement based on the entire Nov.-Jan. upward move and the 50-day moving average are) will be likely open.

On the above chart, we see that the bulls failed to push the price above the gap, which resulted in a sharp decline that took the price even below our downside target (the same day the article was published). Thanks to this drop, the earlier breakout above the upper line of the channel was invalidated, which in combination with the bearish engulfing pattern formed that day opened the day to lower levels. Additionally, on the following day, the sellers closed the green gap formed on Dec.14, which didn’t bode well for the bulls.

Although they tried to come back above the upper blue line, they failed, which translated into another invalidation of tiny breakout (another bearish sign). This show of weakness triggered further deterioration and resulted in one more red gap (146.51-147.27), which together with earlier price action created a reversal island pattern.

What does it mean for the price?

That we’ll likely see a test of the lower border of the blue channel in the very near future (maybe even later in the day). At this point, it is worth noting that this area is also supported by the bullish engulfing pattern created on Dec. 13, 2023, which, together could discourage bears from further attacks.

Such scenario is also supported by the current position of the indicators (just like in the case of both previously discussed companies), which dropped to their oversold areas, suggesting that buy signals in the coming days are quite likely.

Therefore, if the bulls manage to hold this important support area a reversal should not surprise us – especially when we factor in the fact that not far from current levels there is another support zone (based on early November and early December low).

Summing up, the bulls showed their weakness in recent weeks, which resulted in an invalidation of the earlier breakout above the upper line of the blue channel, two more red gaps and bearish candlestick patterns. Despite these bearish developments, the space for declines seems limited as the support areas are just around the corner, which could translate into a rebound in the coming days.

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