On July 6, I wrote about a great trading opportunity in the gasoline futures market.
Back then, I pointed out the mainstream media consensus was that gas prices would continue to soar this summer.
However, the price charts were painting a different picture.
They were calling for a large decline in gas prices, not a big rally…
The technical setup I identified was a large head and shoulders pattern. It’s notorious for signaling trend reversals.
Back in early July, gasoline was trading around $3.73 a gallon.
The head and shoulders pattern signaled that a reversal should reach around $3 a gallon – just over an 18% move – bringing prices back to where they were in March and April.
To see how this setup played out, here’s an updated price chart of gasoline futures…
This pattern has three key defining features – the left shoulder, the head, and the right shoulder.
The pattern is complete once prices break and close below the neckline – as they did in late June. The neckline (blue line) is a trendline that connects the bottom points of the left and right shoulders.
The final component of this pattern is the neckline measurement, which is used to come up with a target for this pattern once it breaks out.
The neckline measurement is taken by drawing a straight line from the top of the head to the neckline. The length of this line is how far we can expect prices to travel once the pattern is complete… in this case about a move down to our target level around $3.
Gasoline futures did indeed trade down to the target level (red line).
Meaning, it’s time to close out this trade.
This is the tremendous advantage that technical analysis offers investors and traders.
Being able to read a price chart accurately is almost like a superpower, where you can see around corners and anticipate what’s going to happen next.
That’s exactly how I felt when I shared the chart of gasoline futures back in early July.
Of course, not every forecast turns out this way..
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That’s why you must have sound risk management and discipline to make it as a successful trader.
I understand that many readers probably haven’t had exposure to a market like gasoline futures before.
And that’s okay… You don’t need to be a hardcore commodities trader to make money from the markets.
But, when the broader market has been performing like it has so far this year, it’s important to be able to branch out and trade in other asset classes.
Especially if you have an interest in active trading and not just long-term investing.
While every asset class has its own peculiarities, at the end of the day a price chart is a price chart.
All I care about is whether I can turn a profit from whichever market currently has my attention.
And that brings me back to my favorite head and shoulders pattern… one that appears in every market on every timeframe.
So, the next time you’re scanning through some price charts, be sure to keep an eye out for this setup to potentially generate some gains.
Analyst, Market Minute
In today’s mailbag, Jeff Clark Trader member David thanks Jeff on his recent essay about the “crystal ball”…
Thanks for the July 18 email on the VIX “crystal ball!”
I was about to change my thinking on where I thought the market was headed as I’m getting ready for the week ahead.
Then on July 31, I decided to look into the “crystal ball” (VIX options). Still looks like options traders are expecting the VIX to go up with the more costly VIX calls. Thanks!
– David B.
Thank you, as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming at [email protected].