Crude Oil Bounce Running Out Of Stream

The West Texas Intermediate (WTI) crude oil bounce is likely to run out of steam in the coming weeks, giving way to a downturn that could test the deep 2018 low. U.S. energy funds could lose ground at the same time, giving up impressive gains posted since December. Even so, longer-term cycles don't support a breakdown through support at this time, raising the odds that lower prices will generate low-risk trading opportunities.

It may be hard to believe, but the crude oil downtrend that started in 2008 is still in force and has now entered its second decade, despite a few years of healthy gains. Sequences of highs and lows determine trends, and the continuous contract has carved four lower highs and one lower low since hitting an all-time high at $147.27 in July 2008. The first sign of a trend change now requires an uptick through the low $70s, where the trendline of lower highs has ended four rallies.

WTI Crude Oil Long-Term Chart (1998 – 2019)

A two-year uptrend topped out at $37.80 in 2000, giving way to a decline that ended in the mid-teens in 2001. The contract turned higher into 2002, completing a round trip into the prior high in the first quarter of 2003. Sellers reloaded positions at that level, generating a secondary downturn that posted a higher low at the 50-month exponential moving average (EMA) a few months later. The subsequent bounce completed a four-year cup and handle pattern in 2004, yielding a powerful breakout.

The rally stalled in the upper $70s in 2006, ahead of a decline into 2007, followed by a parabolic impulse that added nearly 100 points in 18 months before topping out near $150 in July 2008. The contract plunged during the economic collapse, giving up the last rally wave before finding support on top of the 2004 cup and handle breakout. It finally turned higher in 2009, gaining ground for more than two years before topping out at $115, well below the 2008 peak.

Lower highs in 2013 and 2014 generated a lower highs trendline, while selling pressure into the first quarter of 2016 reached a 13-year low in the mid-$20s. The subsequent bounce unfolded in two rally waves, reversing at the trendline in the mid-$70s in October 2018, ahead of a 44% two-month plunge into year end. The contract has bounced into March 2019, recouping less than half of the prior decline.

The monthly stochastics oscillator posted the deepest oversold technical reading since 2014 at the end of last year and crossed into a buy cycle in January. This tailwind could generate a final uptick into heavy resistance above $60, marked by a narrow alignment between the 50- and 200-month EMAs as well as the .382 Fibonacci retracement level of the five-year decline into 2016. A reversal from that level could be dangerous, exposing a trip into the 2018 low.

WTI Crude Oil Short-Term Chart (2018 – 2019)

The first quarter rally looks less impressive on the daily chart, stuck between the .382 and .50 retracement levels of the fourth quarter decline. Price action is also caught between 50-day EMA support and 200-day EMA resistance, marking neutral territory that favors neither bullish nor bearish positions. A final buying impulse could reach the 200-day EMA, which has also aligned with longer-term moving average resistance.

Momentum has waned badly since the second week of January, adding fewer than three points in the past two months. Price action hasn't posted a single higher low since the December low, adding to instability that favors a reversal and retracement, perhaps after a trade deal is finally announced. In any case, there isn't much to do until resistance above $60 is mounted or a decline breaks new support at the 50-day EMA.

The Bottom Line

WTI crude oil may top out soon and enter a renewed decline that could test the 2018 low in the low $40s.

Disclosure: The author held no position in the aforementioned securities or their derivatives at the time of publication.