Key Points:
- Rising wedge has resolved earlier than expected.
- Ascending trend line should now be tested.
- Near-term recovery also likely prior to any further slips.
A shock 8.21M build in US Crude Oil Inventories sent oil prices reeling during the prior session, resolving the developing rising wedge slightly earlier than anticipated. As a result, from a technical perspective, we expect to have price action remain on the downside, even if we are likely to see a small degree of recovery take place in the immediate future.
First and foremost, now that the oil seems to have been freed from its medium-term wedge, we should see it begin to test the confines of the long-term structure. Specifically, we are somewhat overdue for the ascending trend line to be met with a serious challenge which could mean we are about to see losses extend significantly in as we move forward.
This change in momentum would broadly be in line with other technical readings as the commodity has dipped below the 100 day moving average whilst the 12 and 20 day averages have crossed over. Further, the unexpected plunge has inverted the Parabolic SAR bias to bearish as well which could herald a return of bearish sentiment for oil.
However, it’s worth noting that despite this longer-term shift in bias, we could have a modest recovery on hand in the coming session. As is shown on the daily chart, the stochastics have careened into oversold territory and oil’s rout has seemly halted around the 38.2% Fibonacci level. Combined, these two factors could indicate that the commodity might pull back slightly to around the 51.41 mark priorto the 100 day EMA slapping it lower again.
From a fundamental perspective, the severity of the plunge makes it clear that, in the market’s view at least, OPEC’s production freeze is proving ineffectual. Indeed, the cartel’sboast of 140% compliance with its freeze targets by members and 50-60% compliance by non-OPEC members seems to have fallen on deaf ears. As a result, we may see traders take a dimmer and dimmer view of the whole attempt to keep prices buoyant which could see us move back into the $40-50 range.
Ultimately, the proof will be in the pudding so to speak and we will simply have to wait and see if this plunge is indicative of anything more serious than a temporary blip. However, given the technicals discussed above, there is a fairly strong case for continued losses for oil which certainly won’t be going unnoticed by the bears out there.
