Crude Oil: After Bull Flush Out, Bounce Likely In Play
Technical Crude Oil Price Talking Points:
- The ONE Thing: Since August 2016, WTI crude has found support in the lower-$40/bbl. region. The recent drop from $76.81 seems no exception. Now, Bull’s have been flushed out, and bears are pulling back, which could give way for a large bounce.
- WTI has risen 7% for the week seeing highest gain since late June while Brent is set for biggest weekly gain since 2016 at 10.6% higher on reported Saudi cuts.
- Per IGCS, Crude is expected to bounce as the number of net long traders is falling
- The Technical Picture: Bullish RSI divergence appears to be favoring the bounce in addition to a reverting extreme sentiment picture. Tactical target on the WTI crude bounce is $55.57, the 38.2% Fibonacci level of the October 3-December 24 range.
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Technical Forecast for <USOIL>:Neutral
The crude oil price has staged quite the turnaround at the start of 2019. While the slide in prices seems relentless in November, we were keeping an eye on an extreme level in the low $40/bbl region. The reason for this focus is that the lower-$40/bbl. region was a key pivot point in 2016 and 2017, and time will tell if this area will play the pivot again.
Traders continue to focus on the tailwinds for crude’s bounce in 2019 as black gold is hoping to rebound from its worst year since 2015. Crude has been moving alongside risk sentiment, which has also soured lately, but supporting points for a crude bounce appear to be rebuilding.
First, the US Dollar, which tends to be inversely correlated to crude seems to be has been steadily lower toward the year’s open. Powell’s comments on Friday that the Fed will be patient and prepared with flexible policy prompted traders to see less potential upside for the USD.
Second, news on China’s central bank lowering of reserve requirements is helping to support the sentiment picture alongside Friday’s robust NFP print.
Lastly, a reversion to the mean after an extreme downside move in crude and positioning could very well et the tone for an improved posture and a bounce in the early weeks of 2019. The December 24 low will likely be a place where bold bull’s or tactical bounce-playing bears will set their stops at $42.43/bbl while targeting $55.57/bbl., which is the 38.2% retracement and the January 2017 high.
Bearish Bias Weakens Giving Further Room For Bounce
Data source: IG Sentiment
Oil - US Crude: Retail trader data shows 77.9% of traders are net-long with the ratio of traders long to short at 3.52 to 1.
Traders have remained net-long since Oct 11 when Oil - US Crude traded near 7344.7; price has moved 34.2% lower since then. The percentage of traders net-long is now its lowest since Dec 12 when it traded near 5149.5.
The number of traders net-long is 10.5% lower than yesterday and 5.3% lower from last week, while the number of traders net-short is 79.1% higher than yesterday and 53.7% higher from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests Oil - US Crude prices may continue to fall.
Traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current Oil - US Crude price trend may soon reverse higher despite the fact traders remain net-long(emphasis mine.)
---Written by Tyler Yell, CMT
Tyler Yell is a Chartered Market Technician. Tyler provides Technical analysis that is powered by fundamental factors on key markets as well as trading educational resources. Read more of Tyler’s Technical reports via his bio page.
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