Oil Bears vs. Declining Wedge
The sharp drop in oil prices after the market opened on Wednesday could have scared a lot of bulls. But what are the real implications?
Technical Picture of Crude Oil
Let’s start today's analysis from a different perspective.
On Wednesday, after the U.S. markets open, you could read the following:
(…) crude oil moved to the previously broken support/resistance line and tested the 61.8% Fibonacci retracement, hitting the upper line of the consolidation that w observed last week.
Although the price moved a bit higher, the current position of the indicators suggests that further declines may be just around the corner. Nevertheless, as long as there is no daily closure under the previously broken upper line of the declining wedge (marked on the daily chart), the recent scenario is up-to-date (…)
As you see on the 4-hour chart, crude oil actually slipped once again and re-tested the strength of the green support zone based on the upper line of the consolidation that we observed last week. Despite this move, the bulls reacted very quickly, and the commodity bounced back significantly in the following hours, erasing almost entirely the previous downward move.
Thanks to this increase, the price of black gold came back to the previously broken red dashed line based on the previous lows, which looked like a verification of the earlier breakdown and triggered another downswing.
This time, it was quite shallow, which encouraged the bulls to re-test the mentioned resistance.
At the moment of writing these words, crude oil is still trading below the red dashed line and the upper border of the orange consolidation, which means that as long as there is no breakout above these lines, the way to higher levels remains blocked and another reversal can’t be ruled out. If this is the case, the first target for the bears will probably be around yesterday’s low (in the case of crude oil futures).
How did recent price action affect the daily chart? Let’s take a look below.
From this perspective, we see that despite the drop after the market opened, the overall situation in the short term hasn’t changed much as crude oil is still trading above the key short-term line – the upper border of the red declining wedge.
As you see, Wednesday’s downswing took the price of black gold to the green support zone based on the mid-Jul lows, which (this time) withstood the selling pressure, triggering a significant pullback and a comeback above the previously broken upper line of the red declining wedge.
In this way, the commodity invalidated the earlier breakdown, which is a positive sign that could encourage the buyers to fight for higher prices in the following week.
How high could the price go?
The first target for buyers would certainly be the upper border of the red descending channel (currently around $82.57). 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, even though, at first glance, a lot has happened, in fact, in the technical picture, not much has changed. The undoubted argument in favor of the bulls is a strong pullback and an invalidation of the earlier breakdown under the upper line of the rising wedge, which could translate into further improvement in the coming week.
Antero Resources - A Disturbing Sign
Quoting the last commentary on Antero Resources:
(…) yesterday's volume was very strong, raising the risk of another downswing and a test of the strength of the medium-term green support line later today or during Monday's session.
The most important event of the week (at least for the time being) was another downswing, which took stocks under the major support (the medium-term green support line based on the previous lows) and the 200-day moving average.
Although the bulls managed to stop the sellers and trigger a rebound on Wednesday, the price is still trading under the previously broken medium-term line, which now serves as the nearest resistance and blocks the way to higher levels.
Yes, the buyers invalidated the earlier breakdown under the 200-day moving average, which is a positive sign, but as long as stocks remain under the green line all upswings could be nothing more than a verification of the earlier breakdown.
If this is the case, a reversal from current levels and a test of the 61.8% Fibonacci retracement or even the green support zone (based on the late September and early October low) can’t be ruled out.
Nevertheless, please keep in mind that the volume during the recent downswing has been falling from session to session, which, combined with the current position of the indicators, suggests that even if we see one more move to the downside and a test of the mentioned supports, a reversal may be just around the corner.
Summing up, I think it's worthwhile to watch the price action closely at the current levels, because even if the Wednesday rise is a verification of the earlier breakdown, the space for further declines seems limited.
EOG Resources - Where Have We Seen This Before?
The first thing that catches the eye on the long-term chart is a multi-month blue rising triangle, which means that as long as there is no breakout above the upper line of the formation or breakdown below the lower line, another significant move to the upside/downside is not likely to be seen. In other words, we’ll see more price action inside the formation.
Nevertheless, taking into account the fact that stocks slipped under the previously broken red dotted resistance line based on 2014 and 2018 peaks, the probability of further deterioration and deepening the correction is very likely – especially when we factor in the fact that we saw similar price action several times in the past (I marked these situations with orange).
In all previous cases, the sellers managed to push the price lower, which, combined with the sell signals generated by the indicators, increases the probability of the pro-bearish scenario.
But is the fate of the bulls already decided? Do they have any allies who can help them fight to maintain their current levels? Let's go over the weekly chart for clues.
From this perspective, we see that although the bulls broke above the upper line of the blue triangle and the upper border of the medium-term black rising trend channel, they didn’t manage to hold gained levels.
As a result, the price slipped to the channel for the second time in a row, but in my opinion, as long as the 50-week moving average and the green support zone remain in the cards, the space for declines may be limited – especially if we add to that the signals from the short-term chart.
Let’s examine the daily chart.
In this shot, we see that the recent price action took stocks to the solid support zone based on the previous lows, the 200-day moving average, and the green gap created on October 9, which was strong enough to stop the sellers and further declines.
Additionally, when we take a closer look, we see that the size of the first leg of the downward move (between Oct.19 and Nov. 2) is almost the same as the second leg (created between Nov.3 and Nov 16), which shows that the bears haven't grown strong enough to extend the decline (I marked both legs with purple rectangles).
On top of that, the candle created on Nov.16 (called a doji dragonfly) indicates a potential reversal of the downward trend – especially if we connect it to the support zone where it originated and buy signals generated by the indicators.
Summing up, connecting the dots, I think that further improvement is just around the corner. If this is the case, the first target for the bulls will be the resistance area created by the recent peaks and the 50-day moving average (around 125.66-126.30). However, further improvement will be more likely if the buyers manage to close the gap created on Nov.6.
Finishing today's alert, I'd like to ask you once again: Is there a time frame that is particularly important to you? As I wrote on Wednesday, I'd like the new OTA to be as tailored to your needs as possible. I'd be very grateful for any comments or suggestions.
Have a wonderful weekend, and see you on Monday.