Crude call too conservative

Three weeks ago, we highlighted a developing Head-and-Shoulders pattern on WTI, suggesting that a break below the pattern’s neckline at 99.00 could open the door for a drop below 95.00.

In retrospect, that call has proven far too conservative, as oil (NYMEX:CLQ14) prices are at a new 7-month low under 93.00, down over $4 in the last 24 hours. A big factor behind this drop has been an unusual confluence of geopolitical and logistic factors, but the technical outlook nonetheless suggests that there could be room for even more weakness from here.

Yesterday’s collapse took oil below the 78.6% Fibonacci retracement of its January-June rally at 94.75, and the selling pressure has only intensified since then. Yesterday’s price action formed a clear Bearish Marubozu Candle* on the daily chart, indicating strong selling pressure and foreshadowing today’s continuation lower.

Simultaneously, the MACD continues to trend downward below both its signal line and the “0” level, showing growing selling momentum. Not surprisingly, the RSI indicator is now in oversold territory, but that does not necessarily suggest we’ll see an imminent bounce, as we discussed in a similar scenario on the GBP/USD in today’s Lowdown video.
 



Source: FOREX.com
 

Revisiting the H&S pattern, the measured move target projection comes in down near psychological support at 90.00, a level that would have been blasphemous to suggest a mere month ago. Before that level comes into play though, prices will have to break the 2014 low around 91.25, which is also the lowest price oil has traded at in 15 months. Meanwhile, any oversold bounces from current levels may be limited to 94.75-95.25, a zone of previous support-turned-resistance.

* A Marubozu candle is formed when prices open very near to one extreme of the candle and close very near the other extreme. Marubozu candles represent strong momentum in a given direction.

About the Author
Matt Weller

Senior Technical Analyst for FOREX.com. Matt has actively traded various financial instruments including stocks, options, and forex since 2005. Each day, Matt creates research reports focusing on technical analysis of the forex, equity, and commodity markets. In his research, he utilizes candlestick patterns, classic technical indicators, and Fibonacci analysis to predict market moves. Matt is a Chartered Market Technician (CMT) and a member of the Market Technicians Association. You can reach Matt directly via e-mail (mweller@gaincapital.com) or on twitter (@MWellerFX).

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