The West Texas Intermediate (WTI) Crude Oil futures contract has entered a zone of heavy resistance, setting up ideal technical conditions for a reversal and pullback that establishes the top end of a long-term trading range. Fortunately for equity traders, the downturn may not affect battered and bruised energy stocks, which must deal with their own set of fundamentals in a market environment that has been forgiving declining profits.
Crude oil tested 34-year support below $10.00 in April, with the expiring May contract dropping deeply into negative numbers. You can't see that extreme activity on the continuous monthly chart, but it's showing up in the daily view. Even so, it's easy to see that the contract bottomed out in that session, ahead of an oversold bounce that is now dependent on dwindling supply from post-pandemic reopenings and inventory cuts.
A quick view of the long-term chart suggests that the bounce will eventually reach the declining 50- and 200-month exponential moving averages (EMAs) between $50 and $60, but price action is now approaching the breakdown through support at the lows posted between 2016 and 2018 in the lower $40s. That level marks the 50% retracement of the downtrend since October 2018, raising the odds that the first leg of this bounce will soon come to an end.
Continuous Monthly WTI Crude Oil Chart (1983 – 2020)
The long-term contract shows excellent technical symmetry, carving multi-decade support near $10.00, punctuated by the 1986 and 1999 lows. The subsequent uptrend topped out in a parabolic blow-off in 2008, printing the first point in a 12-year descending triangle that drew a perfect trendline of lower highs into October 2018, when it posted the third and final point in the mid-$70s. Declines in 2008 and 2015 held a horizontal trading floor in the mid-$30s, establishing support ahead of the first quarter breakdown.
The decline undercut deep support on April 20, triggering massive volume in equities and futures while signaling a trend climax that could eventually yield a new uptrend. However, the second quarter bounce has now entered a zone of resistance at the triangle breakdown, which is situated just a few points under the breakdown through the 2016, 2017, and 2018 lows. Taken together, it's likely that the contract will reverse soon and drop back into the $20s.
The monthly stochastic oscillator posted the deepest oversold technical reading since 2015 during the selling climax and crossed over, entering a bull cycle that predicts six to nine months of relative strength. This bodes well for buying power during a pullback, but it's hard to tell how long that retracement might last, given huge uncertainty about the effectiveness of reopenings and the willingness of the Organization of the Petroleum Exporting Countries (OPEC) to reduce supplies.
Continuous Daily WTI Crude Oil Chart (2017 – 2020)
The dip into negative prices establishes a second set of Fibonacci levels that may prove useful for short- and long-term predictions. Resistance is easy to see in this view, with price action now entering the huge breakdown gap through triangle support. Meanwhile, the 2016 to 2018 broken trading floor has narrowly aligned with the declining 200-day EMA and .786 retracement level, adding reliability to a reversal call.
The exact level of the reversal will be instructive, perhaps allowing market players to gauge the intensity of resistance at the two big levels in the low $30s and low $40s. Potential downside is easier to prognosticate because another trip into negative numbers just isn't in the cards. More likely, a multi-week pullback will undercut the 50-day EMA near $30 and stretch into the .618 retracement in the mid-$20s before finding committed buying interest.
The Bottom Line
The WTI crude oil contract has approached heavy resistance driven by the March breakdown and could reverse in the next one or two weeks.
Disclosure: The author held no positions in the aforementioned securities or their derivatives at the time of publication.