The consolidations, test of important supports and similarities. What are the implications?
Technical Picture of Crude Oil
Let’s start today’s analysis with the medium-term picture of crude oil.
Looking at the weekly chart, we see that although the price of black gold wavered around the 50-week moving average and the 38.2% Fibonacci retracement in the previous weeks, the overall situation in the medium term actually hasn’t changed much.
Why?
Because crude oil is currently still trading inside two consolidations: the bigger one (marked with orange) based on the body of the red declining candlestick formed in the week started on Jan.29 and the smaller one (marked with yellow) within the white candle started on Feb.12.
Therefore, it seems that another bigger move will be more likely and reliable if the commodity breaks above the upper borders of consolidations or even below the lower line of the yellow formation.
At this point, however, it is worth mentioning that the way to the north is not wide open as the red resistance zone based on the previous peaks and reinforced by the mentioned 50-week moving average, the 38.2% Fibonacci retracement, and the bearish engulfing pattern continues to keep gains in check.
So, what could happen if the bears manage to push the price under the lower line of the yellow consolidation?
We’ll likely see (at least) a test of the 200-week moving average (currently at $72.93). However, if the bulls do not manage to hold this support, we could see a move even to $72.27, where the size of the downward move would correspond to the height of the consolidation.
What’s interesting in this area is also the lower border line of the above-mentioned bearish engulfing pattern in terms of weekly closures ($72.28) and slightly below it – the lower line of the bigger (orange) consolidation ($71.79), which could act as a magnet for sellers when buyers are weak.
Can we see more interesting changes on the daily chart?
Before we find the answer to this question on the chart, let’s recall the quote from yesterday’s Oil Trading Alert:
(…) the price of black gold dived under the lower line of the rising wedge and tested the strength of the next green gap created on Feb.9 before the session closure.
(…) as long as the above-mentioned green gap remains in the cards, another attempt to move higher can’t be ruled out – just like on Feb.12, Feb.15, and Feb.21.
If this is the case and oil bulls close ranks and use the strength of this ally, we’ll likely see an upswing and (at least) a verification of the breakdown under the blue line. If the buyers manage to invalidate this drop, the probability of further improvement and testing the bear's determination to descend to lower levels will increase even more.
From today’s point of view, we see that the situation developed in line with yesterday’s assumptions, and crude oil moved to the north during Monday’s session.
As you can see, the commodity started the day slightly below Friday’s closing price, creating a tiny gap, which lured oil bears to come back to the trading floor. Thanks to their attack, the price of black gold extended losses and tested the strength of the above-mentioned important green gap from Feb.9 and the 38.2% Fibonacci retracement.
Although the sellers moved below them, their opponents were very alert and quickly launched a counterattack. Thanks to their action, crude oil quite quickly came back not only to the opening price, but also above the upper line of the gap formed at the start of the day, which encouraged even more buyers to act.
As a result, they not only pushed light crude to the previously broken lower border of the blue rising wedge (marked with dashed lines), but also managed to break above it, which finally caused a test of the previously broken 200-day moving average.
From today’s perspective, we see that oil bulls managed to move even further, hitting an intraday high of $78.03.
Haven't we seen something like this before?
Of course, we did! Even twice: on Feb. 15 (an intraday high of $78.07) and on Feb.21 (an intraday high of $78.05).
In both previous cases, such price action appeared after the successful defense of the green price gap. Additionally, yesterday (just like in the previous cases) crude oil pulled back before the session closure only to finish the day above the previously broken 200-day moving average. What an interesting similarity to the past!
What happened during the next session in the previous cases?
We could observe a higher open (green gap), a pullback and further improvement, which finally left a white candle on the chart.
Will history repeat itself again? Looking at yesterday's volume, the chance of a pullback during today's session is quite high because as you can see it was visibly lower than during Friday’s decline, which raises some concerns about the power of buyers.
Nevertheless, it is worth keeping in mind that similar drop in volume we could observe on Feb. 21 and it didn’t stop the bulls from fighting again for higher prices.
Therefore, connecting the dots, it seems that we could see another session similar to what we have already seen in the past, and more precisely to what took place on Feb.22.
If this is the case, and crude oil moves higher today, the target for the buyers would be probably the red gap ($78.37-&78.61) formed on Friday.
Summing up, crude oil tested the nearest important supports and closed the gap formed at the beginning of the day, which translated into further improvement and an invalidation of the earlier breakdown under the lower border of the blue rising wedge. Taking this improvement into account, and combining it with the similarity to the past, it seems that another upswing and a test of the red gap formed on Friday may be just around the corner.
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See you tomorrow.
Anna Radomska