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Crude Oil Prices Spike Lower as Volatility Fuels Risk Aversion

Crude Oil Prices Spike Lower as Volatility Fuels Risk Aversion

2020-10-28 18:30:00
Rich Dvorak, Analyst
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CRUDE OIL PRICES PLUNGE TO CRITICAL SUPPORT ZONE AS MARKET VOLATILITY SURGES DUE TO RETURNING COVID-19 LOCKDOWNS

  • Crude oil price action collapses over 5% amid a sharp uptick in volatility and risk aversion
  • Oil prices could fall further if a nearby technical support level fails to curb aggressive selling
  • The commodity could succumb to bearish undercurrents as COVID-19 lockdowns stunt demand
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The price of crude oil slid sharply lower on Wednesday alongside other risk assets like major stock indices. Markets look like a sea of red as trader sentiment deteriorates broadly while coronavirus lockdowns mount across Europe. This has led to a surging measures of volatility and immense selling pressure across crude oil prices, which largely seems to follow worsening prospects for economic growth and corresponding slide in inflation expectations.

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CRUDE OIL PRICE CHART WITH VIX INDEX OVERLAID: DAILY TIME FRAME (24 JUN TO 28 OCT 2020)

Crude oil price chart with VIX Index overlaid

Chart by @RichDvorakFX created using TradingView

Specifically, crude oil prices have snapped back toward month-to-date lows as the S&P 500-derived VIX Index, or fear-gauge, explodes to its highest level since June. The VIX Index and crude oil price action generally maintain a strong inverse relationship as illustrated in the chart above. To that end, crude oil could face further selling pressure if the VIX Index extends its advance as risk aversion takes hold.

Oil - US Crude MIXED
Data provided by
of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily 3% -6% -2%
Weekly -5% 5% 0%
What does it mean for price action?
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CRUDE OIL PRICE CHART: DAILY TIME FRAME (06 MAY TO 28 OCT 2020)

Crude oil price chart technical forecast

Chart by @RichDvorakFX created using TradingView

The steep drop notched by crude oil has steered the commodity back to a critical technical support zone around the $36.75-price level. This potential area of buoyancy is underpinned by a confluence of month-to-date and September lows, the 200-day simple moving average, as well as a positively sloped trendline connecting the string of higher lows notched on 15 June, 08 September and 02 October.

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Failure to maintain this key support level could motivate crude oil bears to make a subsequent push toward the $34.25-price mark before the $31.00-handle comes into focus as the next possible target. Conversely, a relief bounce might be in store if crude oil bulls can defend and springboard off the aforementioned support level back toward the 20 October swing high, but rebound attempts could be undermined by the 50-day SMA.

Read More: How Will Markets React to the 2020 US Presidential Election?

-- Written by Rich Dvorak, Analyst for DailyFX.com

Connect with @RichDvorakFX on Twitter for real-time market insight

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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