Tuesday, May 8, 2012

Brent Crude chart pattern: Oil falls down

In a post a month back about the 2 years weekly bar chart pattern of Brent Crude, the possibility of a fall in oil’s price was mentioned because both fundamentally and technically the price rise seemed unsustainable. The following observation was made: “The levels to watch are 98, 112 and 128. A fall below 112 and/or 98 will be bearish. A rise above 128 will be bullish.”

In a subsequent update, the daily bar chart pattern of Brent Crude showed a break down below a ‘descending triangle’ reversal pattern. Support for the falling price was expected around 113-114 level. Let us take a look at the 6 months bar chart pattern of Brent Crude oil:

Brent Crude_May0712-001-001

Note that the break down below the ‘descending triangle’ (and the 50 day EMA) was followed by a pullback to the lower edge of the triangle. Such pullbacks provide selling opportunities. Oil’s price dropped down to 118, and then started consolidating within a bearish ‘flag’ pattern. A ‘flag’ is a continuation pattern. Since it formed when oil’s price fell from a much higher level, the expected break out from the ‘flag’ was downwards. Pretty much textbook technical analysis stuff.

The 20 day EMA has crossed below the 50 day EMA, and both EMAs are falling. This is a bearish sign. The sharp fall below the 200 day EMA was accompanied by a volume spike – which usually indicates distribution (strong hands dumping on to weaker hands). Though oil’s price fell to 110 on an intra-day basis on May 7 ‘12, the price closed within the expected support level between 113-114. Will the support hold, or will oil’s price fall some more?

All three technical indicators are looking bearish, to the point of being oversold. The MACD is falling below its signal line in negative territory. Both the RSI and the slow stochastic have entered their oversold zones. The bulls may try to stage a rally by taking some solace from the positive divergence in the slow stochastic, which touched a slightly higher bottom while oil’s price dropped lower.

Now, a look at Brent Crude oil’s 2 years weekly bar chart pattern for a different perspective:

Brent Crude_Weekly_May0712

The longer-term chart appears to have formed a bearish ‘double-top’ reversal pattern. The pattern will get confirmed only if oil’s price falls below 98, which is the lowest price between the two tops (at 127-128 - one in Apr ‘11 and the other in Feb-Mar ‘12).

All three technical indicators touched lower tops during Feb-Mar ‘12 while oil’s price reached a slightly higher top. The combined negative divergences had hinted about a likely correction. The MACD is positive, but has crossed below its signal line. Both the RSI and the slow stochastic have dropped below their 50% levels. The correction in oil’s price isn’t over yet.

Note that the 200 week EMA is rising and the 20 week and 50 week EMAs are still well above the 200 week EMA. The long-term bull market in oil’s price is intact. However, a price drop to test support from the rising 200 week EMA is a possibility.

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