The WTI crude oil futures contract has stalled at major resistance and could reverse in the coming weeks, ending the uptrend that started in 2016. That would surprise market watchers, given steady buying interest generated by supply disruption fears in reaction to renewed Iranian sanctions. A downturn may also indicate that growing supply is finally exceeding demand at the same time that many economists are forecasting a worldwide slowdown.
Initial downside won't cause much pain, with the contract trading above long-term moving averages for the first time since 2014. Those support levels suggest that a decline will be mild at first, ending in the low $60s. However, major sell signals will go off if crude oil drops into the upper $50s, opening the door to a bear market impulse that could eventually test the 2016 low in the mid-$20s.
Crude Oil Long-Term Chart (1998 – 2018)
The commodity tested 1986 support near $10 in 1998 and turned higher, entering a secular uptrend that carved an Elliott five-wave rally sequence into 2008. The fifth and final wave posted parabolic action between January 2007 and July 2008, nearly tripling in price into an all-time high at $147.27. The contract plunged during the economic crisis, piercing the parabolic bubble in a six-month 115-point death spiral.
The subsequent bounce mounted the .618 Fibonacci sell-off retracement level in March 2011 and topped out at $115 two months later, marking the highest high in the past seven years. It then eased into a broad symmetrical triangle pattern, finally breaking down in August 2014. Crude oil and other commodities then entered severe declines, losing ground into the first quarter of 2016. The contract undercut the 2008 low by six points at that time, bottoming out at $26.05.
Price action since 2016 has carved a healthy advance that could mark the first four waves of an Elliott five-wave rally pattern. However, the contract has now stalled at major resistance generated by the intersection of a 10-year trendline and two Fibonacci retracement patterns. The larger Fibonacci grid (red) encompasses the entire trading range between 2008 and 2016, while the smaller grid (blue) encloses the Elliott five-wave decline between September 2013 and January 2016.
Those grids intersect at the $70 level, with the .382 retracement of the larger range narrowly aligned with the .50 retracement of the smaller range. Meanwhile, price action reached the trendline of lower highs since 2008 for the fourth time this month, setting off a minor reversal. This falling trendline will come into perfect alignment with the Fibonacci levels in May 2019, setting an expiration date on the current technical set-up.
The contract has consolidated around the $70 level for the past six months while the monthly stochastics oscillator has entered a sell cycle that could last through the first quarter of 2019. The conjoined 50- and 200-month exponential moving averages (EMAs) at $62 should be watched closely while this bearish signal is in force, with a bounce and bullish crossover signaling the start of a potential fifth-wave rally that breaks resistance, or a breakdown into the $50s that could spread contagion through the commodity complex like it did three years ago.
The Bottom Line
Crude oil has stalled at major resistance in the low $70s and could sell off into the low $60s in the coming months. Price action at that level could dictate the contract's direction well into the next decade.
<Disclosure: The author held no positions in the aforementioned futures contracts or fund equivalents at the time of publication.>