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Crude Oil Price Forecast: A Mirror Image Of The February Bounce?

Crude Oil Price Forecast: A Mirror Image Of The February Bounce?

2016-11-03 15:55:00
Tyler Yell, CMT, Currency Strategist
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Talking Points:

  • Crude Oil Technical Strategy: Price breakdown accelerating toward 200-DMA (43.41)
  • Trendline Break From February-August Low Takes Hope Out of Bulls
  • Technical Retracement Could Extend Toward Bearish Channel Median line

Extreme sentiment often markets tops and bottoms in financial markets where there is a view that the trend will continue in that direction indefinitely. The move lower in Oil at the beginning of the year bounced aggressively, and we argued that a break below the channel that had framed price action so well deserved a bounce, but we’d have to keep an eye on the charts to see how much fuel could be behind the move. Now, we’ve seen an overshoot of the same channel on the chart below. The recent move to 15-month highs looks eerily similar to the move out of the channel that was followed by an aggressive move back into the channel.

If we are seeing a mirror image of what happened in Q1, we could be on our way to a much deeper retracement than we’ve been expecting. Yesterday, we discussed the increasing production among OPEC members and Russian Oil company Rosneft amid the negotiations that are intended to bring a drop in production that was followed by the largest rise in U.S. aggregate inventory since records began in 1982.

Interested In a Quick Guide about OPEC, Click Here

Before digging into the charts, it’s worth looking at the options markets for a hint on where money is focused. Per Bloomberg, WTI options volume was the highest in nearly four months after the EIA inventory data with a put bias to calls with the most active contracts being December $40 and $45 puts with December $40 had their highest volume in the life of the contract that shows increasing bearishness of Crude.

D1Crude Oil Price Chart: The Bearish Channel May Still Be In Force, & A Move To Median Developing

Crude Oil Price Forecast: A Mirror Image Of The February Bounce?

Chart Created by Tyler Yell, CMT Courtesy of TradingView

Price extremes are expected to retrace. From the early February low, the price of $26.05 on February 11 low preceded a 99.3% rally to the October high. The sentiment that was explained earlier was very bearish going into the low as many traders, and Oil executives had tried to call a price bottom once the price broke below $100 in July after falling from a high of $107.73.

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Naturally, the price will eventually bounce (drop), so as long as you have the crowd, if you continue to call for a bottom in a downtrend (top in an uptrend) long enough, you will eventually be correct. The price had fallen by more than 75% from 2014 to early 2016 as global demand dropped aggressively. If you look at the big picture from 2014-2016, the price has not retraced 38.2% of the ~75% drop, which would have had the price up to ~$57.24/bbl. Thursday’s average price near $45 is on a ~23.6% retracement of the 2014-2016 drop.

The main idea of technical analysis here is that a return to the median line of the bearish channel that was developed off key pivots in early 2015 may still be in play. A continuation of the retracement would take the price below the 200-DMA ($43.418/bbl) and toward the median line at ~$35/bbl.

The breakdown of the OPEC negotiations due to exemption seekers and the possibility of a stronger US Dollar on the result of the U.S. Presidential Election could be fundamental developments that align with a price drop toward the median line.

On recent technical notes, we’ve talked about waiting for a break of resistance to see if the wash-out of long positions would continue to drop the price. We maintain that view by watching the current November opening range high at $47.34/bbl followed by $49/bbl. Until the break of resistance surfaces, we’ll be anticipating any move higher to unfold in three waves in a corrective fashion that resumes lower.

The burden of proof is now on the Bulls, and we’ll continue to doubt their arguments if the price of Oil to fails surpass $47.34-49/bbl before anticipating new 15-month highs anytime soon.

Key Levels Over the Next 48-hrs of Trading As of Thursday, November 3,2016

Crude Oil Price Forecast: A Mirror Image Of The February Bounce?

T.Y.

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