Technical Crude Oil Price Talking Points:
- The ONE Thing: Crude oil remains in a bullish uptrend against the December 24 low, and now holds above support at $50/bbl. The moves higher have been impulsive while the countertrend moves have not been sharp showing bears are lacking conviction.
- 3-Month implied volatility has fallen aggressively showing that bull’s worries have lessened and bears likely have less of a credible argument for now. The current price rally in WTI is the strongest in three months.
- The fundamental picture supports the uptrend in crude with OPEC communicating their output cuts exceeding expectations and the IEA signaling demand is likely higher than anticipated despite the global slowdown.
- Per IG Client Sentiment, Crude Oil positioning from retail traders has sparked a renewed downside bias
You’re in luck, DailyFX’s Q1 2019 Crude Oil Forecast was just released
Technical Forecast for USOIL: Neutral
Chart Source: Pro Real Time with IG UK Price Feed. Created by Tyler Yell, CMT
Trends can be broken down into impulsive or trend-advancing moves, and corrective or trend-consolidating moves. The trend-advancing moves since late-December have been aggressive while the trend-corrective moves have been chopping and sideways showing the bears have pulled back.
Looking at the WTI chart above, you can see that the price is holding above $50/bbl, and the Ichimoku cloud on an hourly chart. The channel drawn helps to place support in the future near $54/bbl, but the $50/bbl will likely continue to be the market’s focus. With the price above the short-term cloud and the channel support line, traders will have a hard time fighting this rally, even if the topside doesn’t take us near where we were in September.
Why Volatility Matters Now
Implied volatility is seen as a great short cut to gauge bearish pressure in markets. When the future’s outlook becomes hazy and bulls begin to lose their confidence in the backdrop that was supporting the previous environment, implied volatility is a quick way to assess how much fear is there. The higher the implied volatility, the higher the perceived amount of uncertainty or likely fear about the future.
In early Q4, fear spiked when looking at the 3-month implied volatility contract for Brent. Implied volatility is a derived level by option pricing models to make sense of the increase in options prices, which become more valuable as volatility jumps since volatility increases their chance of being in the money.
When volatility falls (as it has been doing for Brent in 2019 as of this writing), it tends to show that the proverbial storm clouds are receding and that the Bull’s fears were likely overblown as were the bear’s hopes. Brent’s 3-month implied volatility has fallen from a level of 44.5 in early January to currently near the January lows at 34.2, a -23% drop. A break below the December low would go a long way in restoring further confidence in the bull’s case.
Data source: Bloomberg
For traders wondering why the environment has changed such that volatility has fallen and WTI crude looks (temporarily) comfortable above $50, I would point to the supportive fundamental picture thanks to OPEC & the IEA. OPEC showed the world how serious they are about restoring confidence to the world that they’d fight a supply-side problem. The cartel’s December production was the largest drop from OPEC and strategic allies like Russia since January 2017.
Data source: OPEC, Bloomberg
Bearish Sentiment Bias Reignites, Potentially Limiting Crude’s Bounce
Data source: IG Sentiment
Retail trader data shows 73.1% of US crude oil traders are net-long with the ratio of traders long to short at 2.72 to 1. In fact, traders have remained net-long since Oct 11 when Oil - US Crude traded near 7235.2; price has moved 28.8% lower since then.
The number of crude traders net-long is 3.9% higher than yesterday and 6.8% higher from last week, while the number of traders net-short is 9.5% lower than yesterday and 15.4% lower 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 further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger Oil - US Crude-bearish contrarian trading bias (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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