Tuesday, June 19, 2012

WTI and Brent Crude Oil charts: an update

WTI Crude chart

WTI Crude_Jun1812

Two weeks back, daily bar chart pattern of WTI Crude was technically in a bear market and was trading far below its 20 day and 200 day EMAs. Technical indicators were looking oversold. Such a combination is usually followed by an upward bounce.

The bounce was a weak one, failing to reach the falling 20 day EMA, and turned into a sideways consolidation. Oversold conditions have been corrected, but technical indicators are still quite bearish. RSI and slow stochastic emerged from their respective oversold zones, but their upward momentum is weak. MACD has crossed above its signal line, but remains negative.

The consolidation may continue a bit longer before the down move resumes.

Brent Crude chart


Two years weekly closing chart pattern of Brent Crude oil shows a double-top reversal pattern with some interesting variations. The first top formed in Apr ‘11 – which itself was a small double-top at 126. The second top formed during Feb and Mar ‘12 as a small head-and-shoulders pattern with a downward-sloping neckline.

Note that RSI and MACD touched much lower tops and slow stochastic touched a slightly lower top during Feb-Mar ‘12. The combined negative divergences plus the head-and-shoulders pattern gave ample warning of a likely correction/trend change. Also note the bearish rounding-top patterns on the 20 day and 50 day EMAs as well as on MACD and slow stochastic.

The lowest point (‘valley’) between the two tops was 103, touched in Sep ‘11. Once oil’s price dropped below 103 in May ‘12, second of the two technical conditions for a double-top reversal got confirmed. The first condition - higher volumes during the formation of the first top – had been confirmed earlier, though the volume difference wasn’t large.

Double-top patterns have measuring implications. Brent crude’s price has a downward target of 80, as per the following calculation: Double-top at 126 less ‘valley’ point of 103 = 23; ‘Valley’ point of 103 – 23 = 80. Unfortunately, chart patterns do not always follow arithmetic – specially in a controlled market. Also, downside targets often fall short in bear markets.

Note that Brent Crude’s price is exactly at the critical support level of the 200 week EMA – which is considered a trend-decider on long-term charts. Technical indicators are looking oversold. An upward bounce from the 200 week EMA is a possibility. A convincing breach below the 200 week EMA at 96 can drop oil’s price to 80.

In last week’s OPEC meeting in Vienna, it was decided that despite the 24% fall from the peak level of 126, the current combined output of the 12 OPEC member nations will be maintained at 30 million barrels per day to aid the global economic recovery. If Brent Crude’s price drops to 90 before the next meeting in Dec ‘12, another OPEC meeting may be scheduled to reduce output. Unless a ‘black swan’ event occurs, a drop below 90 looks unlikely in the near term.

No comments: