Watch Out For The Bear Trap As Markets Become Oversold

Sellers continued to pound the September Crude Oil futures contract this week as support failed at two key retracement levels. The current downside momentum suggests the market could be headed lower, however, we expect the selling to subside a little as the market approaches a former bottom and change in trend point.

Due to the steepness of the current break, we have to be aware of oversold conditions. Some traders use oscillators and indicators to identify this condition, however, I prefer to use the closing price reversal bottom.

This chart pattern can form on an intraday chart, a daily chart or a weekly chart. It is basically defined as a lower-low than the previous time period, a higher close, a close above the opening price for that time period and a close above the mid-point of that time period’s range. There is no math. It’s all price action and order flow.

The chart pattern doesn’t indicate a change in trend is taking place, but actually a shift in momentum. It is often accompanied by a huge volume spike because when it occurs, buyers will be willing to pay anything to get out of their short positions.

The closing price reversal chart pattern also means the buying is greater than the selling at current price levels. After it forms and is confirmed with a follow-through move, it could lead to a 2 to 3 week correction into a short-term retracement area or resistance zone.

(Click to enlarge)

Technically, the…