Technicals | Mar 16 2010
By Chris Shaw
Last Friday the oil market traced out an outside reversal day, which occurs when the high and low for the day exceed those of the preceding day. Outside reversals are viewed by technical analysts as a potential indicator that the end of an existing trend is nigh.
Dennis Gartman, trader and editor of 'The Gartman Letter', views outside reversal days as significant, noting they need to be heeded for the signal they are providing. The reversal in oil is no exception, Gartman pointing out it occurred as the price was getting closer to massive resistance evident in futures markets at the US$82.50-$83.00 per barrel level.
The technical analysts at Barclays Capital agree, taking the view the close below support at US$80.16 per barrel, which was the March 2009 low, is confirmation of a near-term high. This suggests the trend is turning from bullish to bearish, supported by daily momentum rolling over from a bearish divergence.
Another bearish point for oil, according to the technical analysts at Barclays, is the CFTC Commitment of Traders report, which shows the speculative community is long and getting longer of oil. This suggests the odds are in favour of weakness in coming sessions as the newer longs are squeezed out of their positions.
Fundamentals are also supportive of a weaker oil price according to Gartman, as he notes crude inventories remain quite high and the contango is narrowing. A market is in contango when prices for future delivery are higher than the spot price.
The narrowing contango leads Gartman to suggest crude oil currently being stored on ships will be sold rather than stored at unprofitable levels, meaning now is the time to become bearish on crude.
From a technical perspective, the analysts at Barclays suggest the initial downside target for oil (WTI) is the US$76.48/$77.05 per barrel support zone. This represents the February 23 low and a 50% retracement of the February and March advance.
Given the level of longs in the market, the analysts suggest downside risk remains even from those levels, with potential for a move to a range of US$72.66/$74.25 before greater signs of basing might become evident.
The analysts see a move above US$81.41 as needed to indicate a more sideways range bound correction than is currently anticipated.
