Another unseasonably warm winter coupled with weakening technicals is pushing Nymex Spot WTI crude oil back to the lower end of the trading channel that has been in place since October 2006 (see “Oil gets serious,” below).
The market began to break down after peaking at around $78 per barrel in mid August. The selling carried prices down to the key support area of $55 that has been in place since November 2005. From that point forward WTI prices have been trading in a wide, choppy range. After trying for the third time to break through key resistance at $64 per barrel, prices succumbed to another massive round of selling to start the New Year. As of Jan. 8, the market is stalling once again at $55.
This type of consolidation pattern normally is indicative of the market developing a bottom. However, the market sentiment continues to be biased to the downside as the market readies for yet another test of the trading channel support area. In the meantime, the current down move, the third major test of this support area since 2005, can be traded with measured risk. Look to sell a breakout, employing
a very tight stop above the lower breakout line and reverse a position if the breakout to the downside fails. If the downside breakout proves 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.
As this article is being written the entire oil complex is experiencing technical breakdowns with heating oil already below its longer term support area while gasoline and WTI trade near important support levels. If WTI breaches the $55 support level, prices will test the next support level, which is $50 to $52. If that is taken out, the next level is $48.16. Volume has increased during this current down leg, the nine- and 18-day moving averages are widening to the downside and the 14-day average directional index (ADX) indicator is beginning to turn higher after a long period of stagnation indicating that the down trend could gain momentum. Volume increasing during the most recent down leg points to new speculative shorts coming into the market.
WTI is likely to breach $55 this time unless bullish factors kick in. Possibilities include: Opec policing itself on production cuts, a cold front reversing unseasonably warm weather pattern, increased dollar weakness or a flare up in one of the numerous geopolitical hot spots. Trade any breach of $55 with tight trailing stops as reversals can come at any time from any of the above potential upside market drivers.
Dominick A. Chirichella is a director for the Energy Management Institute, www.energyinstitution.org, where his daily market commentary on the energy markets appears. He has been involved in the energy markets for more than 36 years. E-mail: firstname.lastname@example.org.