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Oil Prices are Abiding Clean Technicals, But What is Driving the Market?

Oil Prices are Abiding Clean Technicals, But What is Driving the Market?

John Kicklighter, Contributor
What's on this page

Talking Points:

  • The technical picture on crude oil is remarkably clean with observance of a head-and-shoulders pattern, trendlines and more recently
  • Pure chart patterns are only helping markets along but most capital behind this market is deployed without reference to charts
  • Supply and demand will not be driving tide until the oil glut is truly closed, but speculative over-exposure is pressing now

See how retail traders are positioning US oil prices and a host of other indices and FX pairs intraday using the DailyFX speculative positioning data on the sentiment page.

I'm Here for the Pictures

Fundamentals have been remarkably uneven when it comes to driving the markets - and not just commodities. Looking to the S&P 500, risk trends were forced into a corner for years as the benchmark equity index continued to fly. In FX, EUR/USD followed the ballooning gap in interest rate expectations for a few years and then subsequently completely disregarded them this past year. While event risk and themes do take the reins and trade ownership of assets according to the whiles of the crowd, it has proven difficult to keep up in many instances. That has pushed many traders further and further to a preference for - and for some an exclusive reference of - technicals. There have been plenty of clean, leveraged and volatile chart-based moves across the various asset classes. Yet, if you're looking for conviction, there is still a need for fundamentals to organize the proper motivation.

Crude Is Abiding Clear Technicals

Over the past weeks and months, oil has taken to forming, holding and breaking some key technical patterns. The year started off with a break a three-year range high and 38.2 percent Fibonacci retracement of the 2011 to 2016 bear trend around $62.30. Following that remarkable progress, the commodity's charge stalled and turned to consolidation with a distinct head-and-shoulders pattern to develop through January and a $63.00 'neckline'. The break of this popular reversal pattern happened on February 7th and the tumble continued until technical traders again hit the next meaningful milestone - a rising trendline support at $58. We are currently still forming this stage of the play with the aforementioned neckline playing the role of former support acting as new resistance. Will we continue to operate according to how the charts dictate our movements or will traditional fundamentals start exacting control again?

There Is More Fundamental Influence Than You May Think

The observance of technicals on the oil chart is tough to dispute. And it is equally true that the disregard of traditional fundamental drivers like supply and demand are largely overlooked. This past session, the US reported inventories dropped by 1.6 million barrels which likely helped supply the intraday jump in crude prices; but that won't produce the critical breakout much less trend. Until the global glut in oil is meaningfully closed, there will be little heed paid to the subtle changes in the supply-demand balance. That said, risk trends have exerted a meaningful level of influence over the market. If you overlay a more traditional 'risk' asset like the S&P 500 or draw the correlation coefficient, you see how distinct the correlation between the two was over the past month. Sentiment is not always an active driver, but when it is; crude oil will not abstain from its influence. We focus on oil in today's Quick Take Video.

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