Another Downswing in Crude Oil and Its Implications
On Friday, crude oil lost 2% and extended Wednesday losses. What are the consequences of this price action? Have the bears taken over for good?
Technical Picture of Crude Oil
Although crude oil extended losses on Friday, the short term technical situation has not really changed further to the detriment of the bulls. But how is that possible? After all, the black gold lost another 2% during the last session.
Yes, but take a closer look at the major short-term support – the upper border of the red declining wedge… It's still holding the price before going back into the middle of the formation. In other words, Friday’s drop looks like a verification of the earlier breakout above this line, as crude oil closed the session above this line.
Additionally, when we focus a bit more, we can see a potential pro-growth formation – the reverse head and shoulders pattern. Please keep in mind that it’s only potential as the price of black gold is still trading under the blue declining dashed line, which could be a neckline of the formation.
It means that the bulls will have to push crude oil above it to start thinking about higher prices. In my opinion, the best confirmation of bullish strength will be an increase above the 200-day moving average and the recent highs.
If we see such price action, the way to the upper border of the red declining trend channel will be open. If the bulls move even higher and break this resistance, we could see a realization of the pro-growth scenario about which we wrote last week:
How high could the price go?
The first target for buyers would certainly be the upper border of the red descending channel (…). If they were able to move above it the way to around $87.26, where (at the moment) the range of the upswing is equal to the height of the red declining wedge, it could be open.
If, before we see crude oil there, the bulls will also have to break above the 61.8% Fibonacci retracement and the peak formed on October 27.
Summing up, just like I wrote on Friday, even though, at first glance, a lot has happened, in fact, in the technical picture, not much has changed as crude oil remains above the previously broken upper line of the rising wedge, which could translate into further improvement in the coming week.
What’s New for Natural Gas?
From today’s point of view, we see that natural gas moved higher in the previous week and is still trading above the 50-week moving average and the lower border of the green rising trend channel, which suggests that as long as there is no breakdown under these supports another significant move to the downside is not likely to be seen.
Yes, the sell signals generated by the indicators remain in the cards, but the breakdown under the mentioned key supports is, at the moment, a more important technical factor that could affect the price than the signals themselves.
How did this price action affect the short-term picture? Let’s check below.
Quoting our last commentary on natural gas:
(…) natural gas invalidated earlier breakdown – similarly to what we saw at the beginning of September, creating a green gap, which serves now as the nearest support.
(…) However, we must not forget the fact that yesterday's rising candle was shaped at a seemingly lower volume than the preceding falling candles, suggesting a lower level of buyers' involvement than might be assumed at first glance.
What does that mean for the price?
In my opinion, the bears may want to test the resolve of their opponents and attack during the next few sessions – especially when we take into account mixed signals from the daily indicators.
If this is the case, their first target will again be the lower border of the green rising trend channel and the lower line of the green gap just below it (the support area round 2.995-2.960).
From today’s point of view, we see that the situation developed in line with the above scenario, and the bears showed their claws during Friday’s session. As a result, the price dropped to the first downside target and closed the day below the lower border of the green rising trend channel.
Although this is a negative sign from a technical point of view, we saw similar price action a week earlier and in September. In both cases, the bulls came back and managed to trigger a rebound, which, in combination with the current position of the daily indicators (the CCI and the Stochastic Oscillator generated buy signals), suggests that we’ll likely see another rebound in the very near future.
Additionally, please remember about a potential strong pro-growth formation - a double bottom (of course, if the bulls manage to keep it up for the next few days), which could translate into a significant move to the upside in the coming week(s).
Summing up, in my opinion, as long as the green gap is open, the green support zone based on the recent lows remains in the cards, and natural gas is still trading inside the orange consolidation above the 61.8% Fibonacci retracement (based on the entire September-November upward move) the space for declines seems limited and a rebound could be just around the corner.
Finishing today’s Oil Trading Alert, I encourage you again to comment in our community and submit your worthy suggestions for scrutiny in the coming days.
See you tomorrow.