Crude oil: Breakdown or trap?

On Tuesday, the price of crude oil (NYMEX:CLN14) wobbled between gains and losses throughout the session as mixed data and profit taking weighed on investors’ sentiment.

As a result, light crude reversed after an increase to the resistance zone and declined below an important medium-term support line. Will this event be strong enough to trigger a sizable correction? 

The major factor that has driven crude oil higher in recent days was the deteriorating situation in Iraq - the seventh-largest oil producer in the world last year and OPEC's second-most-important producer country.

Thanks to the Iraqi crisis, light crude increased to a nine-month high, but it seems the impact of the Iraq violence on the price could be short-lived. Investors figured out that active oilfields remain far south from the insurgency and disruption fears are overdone – especially when we take into account the fact that U.S. oil production is booming and most of that oil cannot be exported under current law.

Additionally, mixed data encouraged oil investors to jump to the sidelines. Yesterday, the Commerce Department reported housing starts dropped by 6.5% in May, while the number of building permits issued fell by 6.4% in the previous month. Although these numbers disappointed, upbeat inflation data supported crude oil. Please note that the Labor Department reported that the U.S. CPI rose 2.1% on year in May and 0.4% from April.

How did these circumstances influence the technical picture? Let’s check (charts courtesy of http://stockcharts.com).

Looking at the weekly chart, we see the situation has deteriorated slightly, as crude oil moved lower and reached the rising black support line. If it holds, we will likely see another attempt to break above the long-term declining line which triggered a pullback earlier this week. However, taking into account the position of the indicators (the CCI and Stochastic Oscillator are overbought), it seems to us that further deterioration is just around the corner – especially if crude oil breaks below its major medium-term support line (marked with black).

Will we see such price action in the coming days? Let’s take a closer look at the daily chart.

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