WTI crude oil in a bear trend
So many financial markets have been stuck in sideways trends for a number of years. We can include WTI crude in this group when you look at the price over the last 12 months.
The range has been quite large after we bottomed in August 2016 at $39.26 to reach a peak at $54.24 in January 2017. Since then, the price has dropped at about the same rate as it rose during that period. We have re-tested the November low at $42.20.
However, if you go back seven years it is a completely different story. WTI crude last topped out in 2011 at a high of $114.83. This was after rebounding for two-and-a-half years from global financial crisis lows at $32.40.
The monthly chart below shows how, from 2011 to 2014, the price traded in a sideways range. This range narrowed each year until a break to the downside in mid-2014. This crushing price drop took us from $107.73 down to just $26.05 in only 19 months.
A closer look
Let’s zoom in a little to the weekly chart below. The right-hand side shows the price action from the beginning of 2016. Here crude managed a decent recovery, in fact more than doubling in price from $26.05 to $55.24. This peak was just a couple of dollars from the 38.2% Fibonacci resistance reached in the first week of 2017.
All this proves that WTI crude is in a very clear bear trend. Also, the one-year rally from the beginning of 2016 was just a small recovery in the longer-term trend. This year we’ve seen prices steadily decrease.
Note how last week we broke back below the longer-term 23.6% Fibonacci support at $45.33 and also the 100-week moving average (the blue line) at $45.10. This week’s high is at $45.06, meaning bears didn’t hesitate for a second to sell a re-test of those important levels.
If you look at the 500-day moving average (the green line) in the daily chart below you’ll see that value is also at $45.33. The fact we have held below $45 this week is therefore particularly negative going forward.
It has been a very bumpy ride down and bears have certainly not had it all their own way. A big bounce from late March took the price up nearly seven dollars or over 15% in just three weeks. The next sell-off perfectly held the 38.2% Fibonacci support around $44.10.
A negative pattern?
Both these strong bounces were triggered by OPEC trying to agree production cuts in a desperate attempt to support the oil price. Despite these efforts the price continues to weaken and one could argue we have a negative pattern on the daily chart above.
There is a left shoulder from September to November 2016, with a large head built from November 2016 to the beginning of May 2017. The head-and-shoulders pattern has just completed with the right shoulder breaking below the neckline at $44 this week.
Actually, I don’t believe this pattern is relevant as it took almost the same time to build the pattern (11 months) as it did for the recovery to complete (12 months). This does not fit in with my definition of a head-and-shoulders top. It doesn’t really matter because, in such a longer-term bear trend, the outlook is negative anyway.
See how the downward-sloping blue 100-day moving average is about to cross below the flatlining red 200-day moving average. This is a negative ‘death cross’ confirmation, a longer-term sell signal.
The break below $44 is significant nonetheless, if only because it’s a break of the 38.2% Fibonacci support level, which held so well back in May. In the daily chart above the slow stochastic is severely oversold but this is no reason to be bottom-fishing at the moment.
A weak outlook
The price action clearly indicates further weakness is likely. In fact, if you look closely at yesterday’s candle, we managed a re-test of the 38.2% Fibonacci at $44.09 and topped only 11 ticks above. The bears are obviously not hesitating to stamp on the price at the correct technical levels.
We bottomed just 15 ticks below the previous low set in November at $42.20. I wouldn’t however call this a particularly significant support level. If we do continue lower into next week I would be looking for $41.40, then $41.10, before the 50% Fibonacci retracement level at $40.65.
A bounce from here is always possible in severely oversold conditions as this is more of a psychological level. It looks unlikely, though, that we can get back up through $45 in the near future.
On the other hand, any further losses look likely to target the August low at $39.26/$39.19.
The best bulls can hope for at this stage is some sideways trading to consolidate recent losses and allow the oversold conditions to ease. For today, if we do see a short-term bounce, we meet minor resistance at $43.55/65 $44.40/50. This looks likely to cap any rise.
For reasons stated above, bulls would need to clear $45.50 before they can think about any sort of sustained recovery.
Technical Analyst & Trader
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