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Oil bear market may just be beginning

WTI Crude made a high for this year in June at 107.73 after a nice steady rally throughout the first six months. However since June we have experienced a sharp decline and it took just three months to unwind that six-month gain. You might think that after a drop of over $19 or over 17% that the price of oil is looking pretty cheap. We haven’t even completed the second day of the new month and already WTI Crude has dropped from a high of almost $93 to a low of $88.26 as I write. It’s not uncommon for oil to have a trading range of five dollars over the period of a month so this five-dollar move over a two-day period is remarkable enough. Let’s examine the longer-term charts to try to gain a perspective for the last quarter of 2014.

The weekly chart above goes all the way back to 2012 showing the gentle recovery over the past two-year period. The severe sell-off in the third quarter of this year is clear but you can see how the last three weeks of September saw WTI Crude bottom out at important longer-term Fibonacci support in the mid-$90 area. This coincided with longer-term trendline support as you can see from the lower diagonal yellow trendline. The last red candle you see to the right of the chart represents this week’s price action which has seen quite a dramatic fall from $95 to almost $88. More significantly though you can see the clear break of important support at September lows in that mid-$90 area. We need to go even further back and look at a monthly chart below to get the full implications for this break.

The monthly chart above clearly shows how just today we have made a break below a four-year (yellow) trendline which I have drawn from the bottom of a big sell-off we experienced in May 2010. If you consider that oil has been in a gentle bull trend over this period it is very significant that this trend has been broken today and if this break is confirmed with a weekly close below $90 on Friday 3 October then this could signal that the bear market in oil is only just beginning. I will be looking for downside targets of 86.50 then 2013 lows at 85.60 and below here important support at 83.50/25. This is possibly the next key area for WTI Crude. If this level is broken over the winter months it could be a very swift move to $82 and below here on the longer-term charts there’s really very little to stop further losses towards the $77 area.
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