Oil Stocks – North or South?

Fresh multi-month low, rising wedge, and divergences… What does this mix of technical factors tell us about the future of XOI?

In the previous week, oil bears broke below the mid-Dec. lows and pushed the index to the lowest level in months. What are the consequences of this event? What can we expect in the coming days? I invite you to read today's article, where you will find answers to these questions.

NYSE Arca Oil Index (XOI) – The Current Overview


Let’s start today’s analysis with the quote from the last comment on the XOI posted on Jan.9:

(…) the mid-Dec. low in combination with the 61.8% Fibonacci retracement (based on the entire Dec.-Jan. upward move) stopped the bears and triggered a quite sharp rebound, which left a strongly elongated lower shadow on the chart, creating a pro-growth candle formation (a hammer), which could be a first signal of reversal.

Nevertheless, the sell signals generated by the CCI and the Stochastic Oscillator remain in the cards, suggesting that the move to the downside may not be over – especially when we factor in the bulls’ weakness and their problems with the (…) resistance area (there were two unsuccessful attempts to break above it and the third opportunity was quickly dashed by the invalidation of the earlier breakout).

From today’s point of view, we see that the situation developed in tune with the above assumption and oil stocks extended losses after the last article on XOI was posted.

The potential positive impact of the hammer was negated during the next session and XOI extended earlier declines, forming a new local bottom below the 61.8% Fibonacci retracement.

Although oil bulls triggered a rebound, which invalidated the earlier breakdown under this support and managed to close the Jan.12 session above the previously broken 50-day moving average, the bears did not give up their pro-declining plans and attacked once again using the 38.2% Fibonacci retracement (based on the Jan.4-Jan.10 decline and marked with black on the above chart) on the following session.

Thanks to their action, a big red candle appeared on the chart, which not only erased the earlier rebound, but also took oil stocks to a fresh low. This show of strength lured even more sellers to the trading floor, which led to a test of the December lows in the following days.

When we take a closer look at the daily chart, we see that 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 on 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.

What do I mean?

Oil Stocks – North or South? - Image 2

From this perspective, we see that 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.

Why is maintaining it a key challenge for oil bulls now?

The answer can be found in the monthly chart below.

Oil Stocks – North or South? - Image 3

As you see on the long-term chart, the above-mentioned green support line is also the lower border of the red rising wedge, which means that a confirmed breakdown under this line could trigger a bigger pro-declining scenario and a drop not only to the lower border of the long-term green rising trend channel, but also even to around 1,170, where the size of the downward move would correspond to the height of the formation.

Nevertheless, at the moment such a scenario may be a distant vision for oil bears, as the buyers seem to be more active in the previously mentioned green support zone.

On the bulls' side is also the position of daily indicators. As you can see on the daily chart, 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 and the 50% retracement (at around 1,850) will be likely open.

Summing up, although the bears managed to hit a fresh multi-month low in the previous week, the bulls did not lose their cool and started fighting for higher levels using important supports and leaving behind on the chart a candlestick formation signaling a reversal. Connecting the dots, f buyers do not lose the will to fight and keep the last week's bottom, further improvement seems very likely in the coming days.

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