Oil Prices at Crucial Technical Level

oil stockThe volatility in oil prices has been significant over the past year. These last few weeks has actually seen a lot less volatility almost the “calm before the storm.” Oil prices, as with all commodities, functions based on supply and demand. We can see a lot of these issues played out in the actual oil prices themselves through technical analysis.

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Chart courtesy of www.StockCharts.com

This is a one-year, daily chart of West Texas Intermediate (WTI) crude oil prices. Following the low in October, WTI made a high in November, followed by a low in December that was higher than the preceding low in October. This zigzag pattern continued until the high in late February. This high in late February in oil prices also was an extreme level attained in the Relative Strength Index (RSI). In technical analysis, extreme levels of the RSI, whether they are for oil prices or any commodity, usually indicate a point at which oil prices have gone too far and a pullback is in order. An extreme move in the RSI also occurred in August of 2011, except to the downside, which resulted in a move back up towards the 50-day moving average.

Now looking to the high in late February, we see a similar pattern in reverse. The high in late February was also met with an extreme high in the RSI. Technical analysis would indicate that a pullback is in order for oil prices. The pullback occurred in oil prices, bouncing up off the bull trendline in early April. One can see that oil prices have been forming a giant wedge. The breakout from this wedge will be crucial in determining where the next leg in the market is.

Looking back at oil prices from last year, you will note the horizontal line at approximately $95.00. The circles indicate how many times this level has been used as both support and resistance. In technical analysis, the more a level is pivotal to a move, the more important and relevant that level will be. What is of interest in technical analysis is when more than one indicator points to the same area. In this case, the horizontal support level in oil prices is very close to the 200-day moving average. In technical analysis, when commodities or stocks break down, they tend to gravitate to the 200-day moving average as both support and resistance.

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Chart courtesy of www.StockCharts.com

Turning to the weekly chart, you’ll notice that oil prices are currently hitting an uptrend line that actually goes back to 2009. Technical analysis tells us that, the longer an indicator is in force, the more important it is. In technical analysis, there are no sure things, which is true for life in general. Technical analysis can help us look at the probability of what is most likely to occur through the actions of the participants in the market.

This trendline is obviously extremely significant. A break below the trendline and you will see significant selling pressure in oil prices. Conversely, with a break in oil prices above $110.00, whether it’s because of an attack on Iran or some other event, technical analysis tells us that would also lead to a significant move upwards. Personally, I would sit on the sidelines and wait for this range to be broken on either side. If oil prices break below $102.00, we could see $95.00 as the next level of support. A move above $110.00 and I think the high of 2011 might be taken out. At those points, we would need to see the price action in oil prices for further analysis.