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Crude Oil Prices Weigh Short-Term Vs Long-Term Breakout

Crude Oil Prices Weigh Short-Term Vs Long-Term Breakout

2019-09-15 02:00:00
John Kicklighter, Chief Strategist
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Crude Oil Talking Points:

  • Crude dropped nearly 3 percent this past week but that itself was a range reversal move
  • The commodity will open the coming week at the bottom of a $4 range (wedge)
  • A break through support at 54 would open up to larger support at 50 while resistance stands at 59

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Technical Forecast for Oil Prices: Bullish

Some markets are more tuned towards congestion than others. In general, the broader markets are proving predisposed to congestion versus productive trends. That doesn’t mean that there isn’t modest progress to be met out week-over-week or month-over-month, but true momentum is proving the exception to the rule. If the financial system is due to keep its congestion in place, probabilities would suggest finding markets where congestion is well set. Crude oil presents once such option.

US oil has developed a much different tempo over the past four months than what we had seen over the opening four months of 2019. In that opening phase, the commodity charged a remarkably consistent trend that seemed to align to the broad ‘risk appetite’ run across the market. Yet, with that peak in late April, the consistency fell away. The accelerated drop in May was a large slump, and the swings that have taken shape since that correction have been of shorter duration and reduced their reach. This has turned into a clear descending triangle with extreme bounds at 59 and 50, but there is also a wedge that has formed just in August which pulls a more immediate floor of 54. Therefore, volatility in the week ahead an be expended on getting us back to the top of congestion or forging a breakdown that would still fit a broader range.

Chart of US Crude Oil Prices (8-Hour)

crude oil price chart

Chart created with the TradingView Charting Platform

Looking at the higher time frame chart (daily), we can register that there is at least a higher level of activity against a diminishing range. That is the combination that usually leads to technical breaks. The 20-day ATR is cooling, but it is still substantially higher than the lull we developed during its steadying through the opening phase of the year. Meanwhile, the historical range over the same period has contracted. As a percentage of spot, we are looking at a quiet that is comparable to the pacing in the second quarter. A ‘breakout’ (nondirectional) can be a sudden change in tempo as much as a clearance from a chart-based range.

Chart of Oil with 200-Day Moving Average, 20-Day ATR in Purple, 20-Day Range in Red (Daily)

crude oil price chart forecast

Chart created with the TradingView Charting Platform

When it comes to what is directing the commodity, there is absolutely a connection to the underlying health of the capital markets. Risk trends reflect a good semi-fundamental guidance for the commodity, but – as with most assets – there is a distinct deviation from the performance of pacesetters like the Dow (below in green). Take the 2018 disparity into consideration. This correlation is a strong one long-term, but its relaxing these path months may suggest a particularly weakening of oil bulls. If risk aversion were to kick in, I don’t think crude would be as reticent to follow along.

Chart of US Crude Oil and the Dow (Daily)

crude oil and dow jones price chart forecast

Chart created with the TradingView Charting Platform

A different technical perspective of crude oil has to do with the contract spread between the ‘active nearby’ and the one-month forward. Translation for the non-futures traders, it compares prices for the current October contract that the general market reflects relative to what the market is pricing a little into the future. This creates a situation of contango or backwardation – we are almost exactly even though. Generally-speaking being at even is unusual over the past four years – though there have been some extreme periods such as summer 2018. In a paced market, this insinuates markets are ‘rich’. While shocks should be considered a possibility, bearish pressure would naturally follow if sudden fundamental pressures don’t intercede.

Chart of October-November WTI Crude Oil with US Crude Oil Prices (Weekly)

crude oil price chart

Chart created with the TradingView Charting Platform

See how retail traders are positioned in the GBPUSD, EURGBP, GBPJPY along with other key FX pairs, indices and oil on the DailyFX Sentiment page.

Looking to speculative positioning behind crude oil, we longer-duration, large futures traders are finding some balance around the 400,000 contract net long basis. While that is high relative to market interest before 2018, it doesn’t necessarily imply pressure for a bigger swing – at least not unless we are looking 6 or more months into the future. More immediate, retail traders are more than happy to participate in a fruitful range. Swings these past weeks have been sharp and we ended this past week with hefty confidence that a rebound from 54 is due.

Chart of Net Speculative Positioning in Aggregate Dollar Futures from CFTC Report (Weekly)

crude oil futures chart

Chart of Retail Trader Positioning from IG Clients (Daily)

Crude Oil Prices Weigh Short-Term Vs Long-Term Breakout

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