WTI had a sharp rally over last week from a low point in the $28 area to over $33 by the end of the week. I have been referring to the potential of a rally, or possibly even a bottom on oil over a number of recent blogs and media writings lately. From a disciplined point of view, we never want to catch the proverbial falling knife of a declining security. It is best to wait for any stock or security to base and ideally, break out of the base before becoming too convinced of “a bottom”. At this point, the action by crude oil is encouraging, but I do not want to jump to the conclusion that now is the time to back up the truck and buy. There are a few points of caution to observe:
- Significant resistance comes in for WTI at the 10 week MA. This line coincides with a resistance zone at around $35 – $38/ barrel
- Traditional technical analysis suggests that WTI is still quite entrenched in a bear market. Lower highs and lows, and a price below the 40 week (200 day) MA point to this reality.
- Cumulative moneyflow (bottom pane) and moneyflow momentum (top pane) are bearish
- MACD is not showing positive movement at this time. It is a better indicator for longer termed price movements.
On the positive side, RSI and stochastics – which are relatively faster moving price momentum studies – suggest an oversold bounce could continue. Perhaps the stopping point for that bounce will be the above mentioned $35 – $38 area.
Seasonally, oil can move from around February into the spring, so that’s encouraging too. A break through the $38 zone would be positive for a longer termed trade. However, “V” bottoms rarely occur in oversold markets. Thus, the more likely scenario for crude is to bounce up and down for a while before the true bottom can be identified. As the technical points listed above suggest, I might guess at a temporary lid of $38 for that trading zone. A break out of some type of complex up/down formation and through the $38 lid would be indicative of a market bottom. Meanwhile, traders looking to play oil should view it as an oversold bounce trade rather than a longer termed trade until such an occurrence.