After failing to violate long-term support just above $74 per barrel, which is the 50% retracement from the January 2008 low to the May 2011 high, during the debt ceiling and S&P downgrade crises, front month WTI crude oil has staged an impressive reflex rally. The question remains, was this rally a correction from temporarily oversold levels, or can we expect a retest of the May 2011 highs of $115 in coming months?
Although the rule of thumb in technical analysis always favors reassertion of the dominant, longer-term trend — which is definitely bullish — crude bulls should watch out if the 50% retracement level at $74 is broken because this could signal a retest of major support at the $64.40 area, which is the 61.8% retracement of the three-year bull market and falls almost directly at the 2010 retracement low. If that double support area is violated, the bull move could be invalidated, pointing to a much larger sell-off.
That stated, barring violation of these support areas, the longer-term bull move would be intact. This would suggest retests of resistance at $100 and the May 2011 high. As of Sept. 1, the $90 level looked to be an important pivot area.
Richard L Weissman is a senior associate with the Energy Management Institute (www.emi.org) and author of "Trade Like a Casino: Find Your Edge, Manage Risk & Win Like the House".