Commodities | Apr 01 2016
By Tyler Yell, forex trading instructor, FXCM
- Crude Oil Technical Strategy: About to Test Key Support
- US Dollar weakness is helping commodities & Commodity FX
- Sentimental trading system warns of further weakness
[Note: All prices quoted in USD]
A sustainable uptrend is proven by how it recovers from corrective moves. WTI Crude Oil is seeing its first key retracement as we’ve moved from a high of ~$42/bbl down to $37.55/bbl as of Thursday morning for a 10+% drop. In addition to the ~10% drop has been the first approach of the ~$37/bbl area as support for the first time since August. All other times between then and now, that level has acted as rather firm resistance.
As we currently stand, the US Dollar is set to end Q1 marking its worst performance in a quarter since 2010. The poor performance was cemented on the back of a Janet Yellen speech to the Economic Club of New York where she mentioned US Oil and the need for gradual hikes when they come from the Federal Reserve. Now, it appears as though the Federal Reserve (or, at least, their chief) is looking at Oil as a systemic risk, the way they were looking at banks. If that’s the case, we could see a shift to a weak US Dollar focuses, which not only continues to help equities, but also energy.
The 200-Day Moving Average Has Been A Formidable Foe For WTI Crude Oil Since July 2014.
Key Support Levels from Here
As of Thursday, the 200-day moving average sits below $42 per barrel at $41.23. Given the fortitude of the moving average and its central focus among investors and traders, there is little resistance outside of this level that matters.
Turning our focus to support, where I believe we should spend our attention, the zones that catch my attention are the recent corrective low and the 38.2% retracement at $35.94/bbl and the 21-day moving average, currently at $38.25 per barrel. Should these levels hold the support, we could soon see a rise that would test and potentially break the 200-day moving average for the first time since Q2 2014.
It may also be helpful to watch the RSI (5) below the chart, because if we break back above into the upper half of the 0-100 range, a bull market may be well in force in Oil. In a bull market or a sustained uptrend, RSI can often find support in the ‘40’ level region. If we push higher from here, we could then see a break above the 200-DMA as a potential tipping point higher in the Oil market. If we fail to hold the ‘40’ level, and the 200-DMA does act as resistance, then we could then look for a resumption of the recently dead US-Dollar uptrend to pick back up, and thwart the Fed’s hopes.
Contrarian System Warns of a Test of Key Support Lower
In addition to the technical focus around the 200-DMA resistance and RSI (5) ‘40’ zone support, we should keep an eye on retail trader sentiment, who is wanting to see US Oil take on and break above the 200-DMA. However, a further push lower would align with our Speculative Sentiment Indicator or SSI.
Our internal readings of US Oil show an SSI reading at 1.60 as 62% of traders are long. We use our SSI as a contrarian indicator to price action, and the fact that the majority of traders are long provides a signal that the US Oil may continue lower. The trading crowd has grown further net-long from yesterday and last week. The combination of current sentiment and recent changes gives a further bearish trading bias. If the reading were to turn negative again, and the price breaks above the 200-DMA resistance, we might well be on our way back to $50/bbl. Until then, we’ll respect the 200-DMA as WTI Crude Oil has since August 2014.
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