WTI Crude stable over the past couple of months but little sign of a sustained recovery
Oil bulls will certainly have been more encouraged over the past month with the strong recovery from a low of $42. In fact through the third and fourth week of March we had strong rallies in six out of seven sessions taking us all the way back up to $52.48. Even more encouraging is that, after giving up 50% of this gain, we pushed higher to beat March highs this week. Without doubt we have established a four-week bull trend.
However there is a strong chance that the short-term positive trend is now ending and, if you look at the bigger picture, it’s not quite so positive. The rally topped out this week at $54.13, unable to beat the February high of $54.24. We also just happen to have the 100-day moving average in this area and these two combined resistance levels triggered very sharp profit-taking in oil on Wednesday.
The daily chart above shows how in effect we are trading in more of a sideways channel and how the last four weeks have only taken us to the top of this channel, matching the highs seen in February. It is also worth noting how this has unwound the severely oversold stochastic conditions seen in mid-March, to overbought conditions now. There’s a strong chance therefore that we will continue sideways in the coming weeks, trading within this channel, and in the immediate future risks appear to be increasing to the downside. The four-week uptrend line comes in at around the $50 area today (Thursday 9 April). A break and close below this trendline would turn the short-term outlook more negative therefore.
Is there any hope for bulls? After a very steep decline such as we have seen in oil since the summer of 2014, markets often have a period of stability before a trend change. However, to me this particular period of stability over the past two months looks more like a consolidation pattern in a bear trend.
This means that I would favour a break to the downside, as opposed to a break to the upside. However, I could be proved wrong, simply by a close for more than two days above the 100-day moving average and in particular a weekly close above this area on Friday. The second leg of this four-week bull trend started at $47 and it is up to just above $54. We have retraced 50% of this move, just as we did in the first leg towards the end of March. If this 50% area holds it means we have seen a successful test of the four-week bull trendline and could see a return to the low $54 area and retest the February highs and the 100-day moving average. As stated above, bulls will then need to engineer a sustained break above this level to turn the outlook more positive in the medium term.
I will finish up with a quick look at the weekly chart, which doesn’t really give us any further guidance on future direction, but does just emphasise how far we have fallen. Clearly there is no V-shaped recovery and in my opinion this sideways action over the last two to three months has really only allowed not only the daily, but also the weekly oversold conditions to unwind before a potential resumption of the one-year bear trend.
Jason Sen – Technical Analyst & Trader
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