Oil has been on the rise for the most part of 2014. As mentioned in a previous article, conflict in Iraq and Syria has acted as a catalyst to upward momentum, and pundits are still very uncertain as to the full impact of recent events. As you can see from the chart below, the $104 level has acted has a very significant level of support/resistance over the past year. You’ll notice how this level has acted as support shown by the blue arrows. Since the price has been trading above $104 for the past month, the price action suggests that the bulls will be looking to enter a position near the horizontal trendline and protect their positions by placing stop-loss orders either below the trendline or below the 200-day moving average ($99.99). (For more, see: Support And Resistance Basics.)
Taking a Look at the OIL ETN
For retail traders who do not have a futures account, one of the most popular methods for gaining exposure to crude oil is to invest in the iPath S&P S&P GSCI Crude Oil Total Return Index ETN (OIL). Taking a look at the chart, you’ll find that the recent pullback has sent the price down toward a short-term ascending trendline. Checking the Fast Stochastics indicator you’ll find that it is trading in oversold territory, which suggests that the pullback is nearing the end. Some active traders who do not like to be whipsawed out of a position may wish to wait for the Relative Strength Index to confirm a move higher before entering a position. Currently, the RSI is trading at 45.40, so a move below 30 may be what is needed for some traders before being convinced that the pullback is over.
A Look At The Refiners
When analyzing crude oil it often makes sense to see how the price changes are impacting the major refiners. Taking a look at the chart of Valero Energy Corp. (VLO) you’ll see that the price has recently moved lower on heavy volume. It's interesting to see how the support of the 200-day moving average was able to prevent further losses. Oversold levels on the Fast Stochastics indicators and the recent price consolidation suggest that a move higher may be in the cards.
The technical outlook for Marathon Petroleum Corp. (MPC) is more bearish than the charts shown above since it has broken below the support of its 200-day moving average. Oversold levels on the Relative Strength Index and the Fast Stochastic Oscillator suggest that a bounce may be in the cards, but with significant resistance from the moving averages traders will wonder if the underlying commodity and other major companies in the sector are in for a continued move to the downside.
The Bottom Line
The spot price of crude oil, the primary tracking ETN and a key refiner are all trading near key support levels. Oversold readings on major indicators such as the Fast Stochastics and the Relative Strength Index suggest that a bounce may be in the cards over the coming weeks. However, price action of Marathon Petroleum Corp below its 200-day moving average may be a red flag. Active traders will want to keep a close eye on key support and resistance levels to see how the underlying prices react. A move below the support would negate the theory of a bounce higher and would cause traders to turn bearish. (For more, see: 5 Biggest Risks Faced By Oil And Gas Companies.)