As summer comes to a close, technicals in the crude oil market show relief may be at hand. Can this news, coupled with some bearish supply fundamentals, trump geopolitical concerns and deliver a larger correction pushing prices back to the long-term trend line?
Crude oil has been in an uptrend for several years and prices have been oscillating along the long term uptrend line since early 2005 (see “Is relief at hand?”).
In 2005 WTI has experienced one strong move to the upside during the February to early April period only to become mired in a wide rectangle/consolidation pattern. WTI has been in this pattern since early April 2006.
This type of pattern normally has a tendency to ultimately break out in the direction of the original trend. However, the market sentiment has been biased to the downside as the trade readies for yet another test of the rectangle support area. At the time of publication the support area had been breached with another bearish inventory report serving as the catalyst. The technical community will be watching this pattern through the next few weeks.
In the meantime, the current down move, which is the fourth test of this support area, can continue to be traded with measured risk by looking for a window to sell the breakout and employing a very tight stop above the lower breakout line and reversing the position if the breakout to the downside fails. If the downside breakout does prove to be a false signal, prices will work their way toward the upper end of the range, a tight trailing stop can then be employed to protect profits in the event of failure of what would be the fourth attempt at an upside breakout.
At the time of publication the market was under technical pressure with crude oil, gasoline and heating oil all taking out support levels. There is still some downside, with WTI possibly heading to $60.50 per bbl. or to the longer term up trend support line. However, the selling momentum will begin to weaken and sentiment will change as the market turns its attention back to the numerous market drivers, including the Iranian nuclear enrichment debacle as well as OPEC beginning to indicate that they would support prices in the $60 range is required. This support would come in the form of a crude oil production cut.
Overall energy prices may drift down to the longer term support but the likelihood for a major decline from that level is diminishing. Expect prices to stabilize at or near the longer term support line as geopolitical and OPEC concerns grab the markets attention.