My pattern work is warning me that all of the action in crude oil off of the Aug 25 low at $70.76 is a digestion period of the major downleg from the August 4 high at $82.97 to the August 25 low at $70.76.

If that proves to be an accurate description of the price movement, then it should be labeled as a "Bear Flag" type of formation, which when complete will resolve itself to the downside with the initiation of a new downleg. The downleg should break both the Aug low ($70.76) and the longer-term support line from the January 2009 low, which cuts across the price axis around $71.15.

Such a violation of support should trigger serious long liquidation in crude oil. ETF traders should be watching the US Oil Fund ETF (USO).

 

Mike Paulenoff is a 26-year veteran of the financial markets and author of MPTrader.com.