Oil Stocks – Is Reversal Just Around the Corner?

The combination of important supports triggered a dynamic rebound that took oil stocks to an interesting area. Is it over?

In recent days, crude oil collided with a resistance zone that interrupted the bulls' march to the north and lured their opponents to the trading floor, which resulted in a creation of an important candlestick formation. What happened at the same time with NYSE Arca Oil Index (XOI)? In today’s article you will find the current overview. Have a nice read.

Oil Stocks – Is Reversal Just Around the Corner? - Image 1

Let’s start today’s analysis with the quote from the last comment on the XOI posted on Jan.23:

(…) the index slipped below the Dec.12, 2023 low and hit a fresh multi-month low of 1,761.66 on Jan.18, but despite this deterioration, the bulls quickly sprang into action and successfully invalidated the earlier tiny breakout, creating a hammer on the chart.

Can we trust it and believe that it will initiate a bigger rebound in the coming days?

As you see from the daily chart, it was formed in an important support area based not only on mid-Dec. lows, but also on the previously broken short-term green declining line.

Additionally, when we switch to the weekly chart below, we notice that it appeared in a place that is important for two more reasons. (…)

Oil Stocks – Is Reversal Just Around the Corner? - Image 2

(…) the recent downward move took oil stocks to the green support area and the 50-week moving average, which was strong enough to stop the sellers several times in the past.

On top of that, the XOI reached the medium-term green line based on Jul. 2022 and May 2023 lows, which serves as the key support.

(…) On the bulls' side is also the position of daily indicators (…) there are positive divergences between the RSI, the CCI and the index, while the Stochastic Oscillator generated a buy signal, which suggests that further improvement may be just around the corner.

If this is the case and the XOI moves higher from here, the first upside target for the bulls would be around 1,830, where the 38.2% Fibonacci retracement based on the entire Jan. decline is. If this resistance is broken, the way to the mid-Jan. highs (…) (at around 1,850) will be likely open.

Looking at the charts, we see that the combination of the above-mentioned supportive technical factors encouraged the bulls to fight for higher levels as expected.

Thanks to the buyer’s determination, the XOI bounced off the medium-term green support line, the green support zone and the 50-week moving average (all marked on the weekly chart), which resulted in a big with candle seen on the weekly chart.

Last week’s price action also took stocks not only above the 200-day moving average, but also above the previously broken 50-day moving average, which resulted in a climb to the upside target from the last commentary on XOI – the mid-Jan. highs.

In this way, the bulls also broke above the 38.2% Fibonacci retracement based on the entire mid-Oct.- mid-Jan. downward move, which resulted in further improvement in the following days.

Although XOI pulled back on Monday, the previously broken retracement stopped the sellers, triggering a rebound, which left on the chart a candlestick with a prolonged lower shadow, proving the activity of the bulls in the area of the daily low and their willingness to defend it.

On the following day, buyers’ commitment brought a very good result and the index shot above the next Fibonacci retracement and gained 1.91%, leaving a big white candle on the daily chart.

What’s next?

Taking into account the recent price action and bulls’ involvement, it’s very likely that we’ll see a test of the nearest resistance zone (created by the previous peaks [in terms of daily opens and closures], the 61.8% Fibonacci retracement and the short-term red declining resistance line based on the previous important highs) in the very near future (maybe even later in the day).

Nevertheless, when we take a look at the current position of the daily indicators, we’ll see that they reached their overbought areas, which suggests that the space for increases may be limited. Additionally, please keep in mind that similar readings of the CCI and the Stochastic Oscillator preceded local tops and reversals, which increases the probability that history may also repeat itself in the coming days.

Therefore, keeping an eye on the behavior of the bulls, seems to be a very good idea, because any show of their weakness in the mentioned resistance area could encourage the sellers to attack and push the index lower.

How low could stocks go?

In my opinion, if the bulls fail to push the XOI above the nearest resistances, we’ll likely see a reversal and a drop to (at least) around 1,854, where the previously broken 38.2% Fibonacci retracement and the Monday’s low are.

Summing up, the combination of important medium- and short-term supports lured oil bulls to the trading floor, which resulted in a dynamic rebound that approached oil stocks to the Nov. and Dec. peaks. At the same time, daily indicators approached their overbought areas, which suggests that reversal may be just around the corner.

If you’d like to know what the current technical picture of crude oil is or to find out what arguments the bulls have or what allies do the bears have, I encourage you to subscribe to Oil Trading Alerts, where you’ll find the answers to these (and many other) questions.

See you tomorrow.

Anna Radomska