Oil prices have nearly doubled since they bottomed in February.
There is a lot of excitement right now in the oil market.
Some analysts are now calling for oil to reach $60 and $80 a barrel.
However, as longtime LeadingTrader subscribers know, when the greed and excitement in a market reaches an extreme point, we ought to be very careful.
Here’s the chart which shows you where oil is likely headed next…
As you will see from the above chart, I have outlined 3 potential routes which oil prices could take (labelled 1, 2 and 3).
Firstly, this rally in oil is most probably “wave 5” – in other words, the final wave in a major trend. After 5 waves, price usually starts a correction.
The two diagonal red lines – or “trendlines” – on my chart show that the distance between the highs and lows is tightening. This is a bearish pattern.
If oil breaks support at the $47.70 level and closes below this level, then we could see a move down to the next level of support at $43 (see green line labelled 2).
The $43 level will most likely hold oil, but if it does not hold and oil closes below this level, then we could see a move down to $35 (see blue line labelled 3).
In any case, a move down to $43 and $35 will provide investors with another opportunity to go long on oil and the best quality oil stocks.
Let’s not forget that there is still some upward momentum in oil – so unless we break support, there is still a chance that oil can make another push higher above $50 (see orange line labelled 1).
For the moment, there is no point standing in front of this freight train.
We will wait and see what oil decides to do… and we are prepared.
Alessio Rastani is a stock market trader at www.leadingtrader.com