Key Points:
- RSI Oscillator flirts with oversold levels.
- 3-Drive pattern completes on 4-hour timeframe.
- Watch for a break higher in the coming days.
Crude oil has been on a wild ride the past few weeks as the commodity has reacted to increased geopolitical risk in the Middle East, as well as rising U.S. Inventory stockpiles. In fact, as I compile this summary the WTI selling is coming strongly in waves as the fragile war of words over Qatar, and their engagement with Iran, seemingly threatens to boil over into actual conflict. However, the technical indicators are telling a different story and we could be just about ready to see a reversal.
In particular, the decline of the past few days has seen the completion of a relatively clear 3-drive pattern on the 4-hour timeframe. Coincidently, the pattern’s completion has occurred right on the 78.6 retracement level of the overall bullish wave which seemingly adds to its relevance. In addition, the RSI Oscillator is right on the edge of oversold territory and is now trending sideways which suggests that price action’s momentum might be about to change. Finally, WTI prices are currently resting upon a key level of support from early May so it would seem that there are plenty of indicators of a potential turnaround for crude oil in the week ahead.
However, any speculative trades to the upside certainly come with plenty of fundamental risk given the ongoing glut of global supply and the risk of a break down in OPEC’s supply cap agreement. There is a real risk that the current argument flooding the Gulf Council members over Qatar’s connection with Iran could lead to a break in OPEC’s supply cut agreement. However, equally valid is the risk of the current tensions causing military action which would cause crude oil prices to skyrocket.
Ultimately, there are plenty of factors, both fundamental and technical, to suggest that crude oil’s decline might have reached its limits. However, the prudent trader would await confirmation of a reversal before countenancing an entry. The most likely scenario involves WTI prices moderating in a sideways direction before turning sharply to rally back towards resistance at $47.73. However, be aware of the risk of volatility from both action in the Gulf States, as well as action from OPEC.