Oil: After A Failed Breakout, What Next?

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Includes: BNO, DBO, DNO, DTO, OIL, OILK, OILX, OLEM, OLO, SCO, SZO, UCO, USL, USO
by: Sandeep Singh Ahluwalia
Summary

The Federal Reserve provided the bears with some much-needed support.

President Trump’s State of the Union address has caused some confusion in the oil market.

The recent downswing in the crude oil market is highly correlated with the release of bearish economic data around the world.

In my last article on 8th January, I had highlighted that the price of Brent oil (BNO) would rise till the upper line of the box range pattern after which it shall trade sideways. This belief of mine proved to be true as by 11th January the price of Brent oil had risen till the $62.52 mark, after which it traded in a sideways pattern as expected. This is as the commodity could not have a clear breakout above the resistance level. On the other hand, I stated that I expect the price of WTI crude (OIL) to rise till the 161.8% Fibonacci resistance level as this was the upper line of the box range pattern. This proved to be true as the commodity reached the 161.8% Fibonacci resistance level by 18th January after which it entered a sideways pattern as expected. Thus, the big question now is whether the incline in oil prices has come to an end or not. Hence to establish this, I shall look at the fundamental news affecting oil, whilst also analysing the charts using technical analysis tools.

Fundamental news

Dovish Federal Reserve:

I expect the dovish position taken by the Federal Reserve to give a boost to the oil bulls in two ways. Firstly, I expect the lower-than-expected interest rates to provide a bullish jolt to the American economy, which will help the stock markets have a rise. Secondly, I expect the softer rate outlook to help undercut the greenback in the international market. This in turn shall strengthen crude oil demand in the rest of the world. However, I do not believe the bullish impact of this shall be felt now. I say this as it shall take some time for the new demand levels to kick in.

Trade talks:

Crude oil traders were hoping President Trump would make some positive comments about the trade war in his State of the Union address. If this had occurred, then we would have seen a positive movement in the oil charts as it would have infused some much-needed bullish energy. However, this failed to happen as President Trump’s few words regarding the trade talks put the oil market bulls in further confusion. I say this as in the daily chart of both Brent oil and WTI crude the candle formation was bearish in nature. Moreover, this indicates to investors that the oil market is rather unhappy with the proposals made by President Trump in his address.

Poor economic data:

I believe the recent downswing in the crude oil market is highly correlated with the release of bearish economic data around the world. This is as the U.S. factory orders in November fell by 0.6%. Moreover, the poor global economic situation was made worse as China’s economic growth came in at 6.6% for 2018. This is China's lowest growth level since 1990. Thus, due to all this I expect the bearish pressure to subsist in the market, which in turn shall dilute the bullish energy provided by the dovish Federal Reserve.

Technical Analysis

Brent Oil:

Brent Oil

Brent oil’s daily chart indicates to investors that the commodity will be trading in a box range pattern for the next one to two weeks. I say this as the commodity has clearly demonstrated that it does not have enough bullish energy to break above the 161.8% Fibonacci resistance level highlighted in my prior article. I say this as the commodity in the past 20 trading sessions has attempted a breakout above this resistance level 9 times but has failed to do so. Moreover, the commodity’s lagging line is presently trading below the Ichimoku Cloud pattern, which indicates to traders that the bears have a firm grip over the commodity.

On the price target front, I expect the upper line of the box range pattern to be at the 161.8% Fibonacci resistance level at $62.52. This is as the level is a tried and tested resistance zone. Whilst, for support, I expect the commodity to take support from the 50% Fibonacci support level at $61.41. However, if the 50% Fibonacci support level does break then I believe the commodity shall fall till the range between the 100% and 127.2% Fibonacci support level. The 100% Fibonacci support level is at $59.55, whilst, the 127.2% Fibonacci support level is at $58.53.

WTI Crude:

WTI Crude The daily chart of the oil contract hints to traders that the commodity will be forming a change of polarity zone in the coming one to two weeks via the help of a box range pattern. I say this as I expect the commodity to have a decline till the 161.8% Fibonacci support level which shall provide WTI crude with a support for the foreseeable future. This is as the 161.8% Fibonacci support level is a former resistance level, which I believe shall now act as a support zone. Moreover, the reason I expect this decline to occur is due to the current candle partly breaking below the 50% Fibonacci support level. This indicates to traders that the bullish drive has significantly eased and that the bears are controlling the market.

On the price target front, I expect the upper line of the box range pattern to be at the 100% Fibonacci resistance level at $55.83. I do not expect a break out above this level as it is a long-term resistance zone. Thus, the oil bulls will need some fantastic news to trickle in for them to have a breakout above this price point. For support, I expect WTI crude to fall till the range between the 127.2% and 161.8% Fibonacci support levels. The 127.2% Fibonacci support level is at $51.94, whilst the 161.8% Fibonacci support level is at $50.99.

The big picture

Overall, I am leaning towards the bulls and bears having a tussle that shall result in WTI crude and Brent oil trading in a tight box range pattern as mentioned above. This is driven by the fact that the technicals support such a pattern in the respective commodities. Moreover, I do not expect both the oil contracts to have a strong bullish breakout as they have failed to break above their key resistance levels for the prior 20 trading sessions.

Good luck trading.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.