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Tuesday, May 22, 2012

Brent Crude oil chart pattern: an update

The 6 months bar chart pattern of Brent Crude oil is playing out almost exactly as per expectations. In the previous update, the support level at 113-114 had stalled the sharp fall below the 200 day EMA but the bearish technical indicators had pointed to a deeper correction.

After a brief pause around the 113 level on a closing basis, crude oil’s price started falling in earnest on rising volumes – which is a bearish sign. The 110 level was tested a few times on an intra-day basis before the price dropped close to the 106 level.

The 20 day EMA has dived below the 200 day EMA. The 50 day EMA is hurtling down towards the long-term moving average. The ‘death cross’ will technically confirm a bear market. Oil’s price has fallen too far below its 20 day EMA – indicating an oversold condition. Yesterday’s bounce above the 109 level was probably due to short covering because of the much lower volume. Any follow-up buying will help to correct the oversold condition and allow bears to resume their selling.

BrentCrude_May2112_daily 

The technical indicators are quite bearish, and correcting from oversold conditions. The RSI is showing negative divergence by falling deep inside its oversold zone even as oil’s price touched a higher bottom than its Dec ‘11 low. Also note the head-and-shoulders reversal pattern in the RSI back in Feb ‘12 as crude’s price was rising to a new high. That was an early warning about a correction.

The MACD is below its signal line in negative territory and also showing negative divergence by falling to a lower bottom than the one touched in Dec ‘11. The slow stochastic bounced up a bit after testing its previous bottom of Dec ‘11. The combined negative divergences are hinting at a steeper fall in oil’s price after the current bounce.

Is the longer-term 2 years weekly  bar chart pattern of Brent Crude oil looking just as bearish?

BrentCrude_May2112_weekly

Not yet, if you notice that oil’s price is trading well above its rising 200 week EMA. Yes, if you note that all three technical indicators touched lower tops as oil’s price touched a slightly higher top in Feb ‘12. The combined negative divergences warned of a correction, if not a change of trend.

The slow stochastic has dropped inside its oversold zone, but the RSI has not done so yet. The MACD is below its signal line and just about slipped into negative territory. The price correction isn’t quite complete. However, a pullback towards the 50 week EMA may precede the next leg of the down move.

All eyes should be glued to the 98 level – the previous low touched in Aug ‘11 and Oct ‘11. If crude oil’s price falls below 98, it will technically confirm a double-top reversal pattern, which is very bearish and a trend changer. The downward target of the double-top is 68 – the low touched back in May ‘10.

Such a calamity may not happen for oil bulls, but the possibility can’t be ruled out. The good news for the bulls is that the rising 200 week EMA may prevent such a disaster. The current bounce in oil’s price can be used to exit. Alternatively, one can hold with a strict stop-loss at 96. The rising volumes during the past few weeks’ correction shows that the time is not opportune for bottom-fishing.

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