- Crude Oil Technical Strategy: Favoring Downside < $45/bbl
- Intermarket Analysis Shows US Dollar May Be Public Enemy #1 For Crude Bulls
- Sentimental Trading System Shows The Trend May Be Reversing
The price of WTI Crude Oil (CFD: USOil) traded at its lowest levels in two months as further disappointment comes out surrounding a boost in drilling with fears that demand may be less than anticipated.
On the charts, the Relative Strength Index (RSI) looks to be sitting on Bull-Market Support. Bull-Market support is typically seen as a range of 40-80, with a breakdown favoring a shift to a more bearish environment. The technical note below will help you identify zones worth focusing on if RSI breaks lower.
We encourage you to keep an eye on increasing supply in H2 2016, and whether or not supply will be met with sufficient demand. One important fundamental story to keep an eye on before we get to the charts is the increase in exports from Russia. An encouraging story has been the balancing out of the supply glut even as the price of Oil. However, Russia may be the new OPEC in terms of threatening the recovery. Since July 2014, Russia’s shipments have increased, and their YoY shipments have increased 4.9%.
That being said, we could be seeing a new wave of supply coming onto the market, and if demand cannot keep up, we could move lower. To explain how much lower, let’s move on to the charts.
As US Dollar Has Support, Watch Polarity Level on USOil At ~$45-46/bbl
We’ve long been a fan of the 55-Day Moving Average as a rudder on medium-term Crude Oil directional bias. Currently, Oil is trading below the 55-DMA at $47.58/bbl. The Fibonacci-Sequence Based Moving Average has held as safe support for nearly four months now. Last week’s strong break could prove significant. For now, we will use the 55-DMA as resistance as we brace for a move lower.
As of Monday, the price of USOil is looking comfortable below the Weekly Pivot at $46.42/bbl. Swing traders should keep an eye on the Weekly S1 & S2 at $43.50/bbl and $41.85/bbl respectively.
A move toward the S2 at $41.85/bbl would open up the scenario of further weakness toward the 38.2%-61.8% retracement zone of the February-June rally. This zone is around $41.85-$35.81/bbl. US Dollar strength would hasten such a move. Monday has seen a risk-on move with S&P500 (CFD: SPX500) trading at lifetime highs intraday, but Oil does not appear to have received the risk-on message yet.
In addition to the 55-DMA acting as resistance, if the price can break above $47.58/bbl we’d be quick to focus on the current June high of $51.64/bbl. There is a lot of resistance in the $51/bbl region such as the 100% Fibonacci extension move off the
February low and the October 2015 higher.
The pullback we’ve seen is not surprising. Furthermore, if we break above the ~$51 resistance level, a stronger break toward the next key resistance level ~$60 could be underway. However, further US Dollar strength would continue to pressure the price of Oil down to the 38.2%-61.8% retracement zone of the February-June rally.
Contrarian System Warns of Further Downside As of 7/11/16
In addition to the technical focus around multiple support-zones, we should keep an eye on retail sentiment, which favors more downside price action. Further downside is currently aligned with our Speculative Sentiment Index or SSI for now.
As of mid-day Friday, the ratio of long to short positions in the USOil stands at 1.06, as 51% of traders are long. Yesterday the ratio was 1.14; 53% of open positions were long. Long positions are 0.8% lower than yesterday and 79.4% above levels seen last week. Short positions are 6.5% higher than yesterday and 10.9% above levels seen last week. Open interest is 2.6% higher than yesterday and 32.5% above its monthly average.
We use our SSI as a contrarian indicator to price action, and the fact that the majority of traders are long gives a signal that the USOil may continue lower. The trading crowd has grown less net-long from yesterday but unchanged since last week. The combination of current sentiment and recent changes gives a further mixed trading bias.
Key Levels Over the Next 48-hrs of Trading As of Monday, July 11, 2016