Commodity prices have come under pressure in recent weeks, partly because of the rising dollar. Among them, the price of oil has pulled back — and with it has just about erased half of its rally off the December lows.
The bull case is that lower fuel costs will help the economy. The bears, however, will point out that slipping oil prices might just be the result of lower demand, and thus an unhealthy sign.
Confused? You should be — just know that anytime oil slips, you can make both arguments. However, the charts might be a little more clear about the current and future price of oil.
From a longer-term-trend point of view, oil has two pivotal trend lines — the upper one serves as resistance near the $98 mark, while on the lower end, a level closer to $77 is important to watch. As always, these are better reference points than spots for hard stops or profit targets. Further, note the narrowing trading range during the past 20 months or so in which the price of oil has gyrated:
On a closer-up chart, we see that oil is currently trading in the middle of the longer-term narrowing range discussed above. More near-term, a simple uptrend line (in blue) serves its purpose. The uptrend line also happens to coincide with the 61.8% Fibonacci retracement of the swing up from the November lows to the February highs, as well as the 200-day simple moving average (not on the chart). All three of these indicators are coming together in the $89.50-$90.50 area, thus forming a beautiful confluence zone of support.
From a swing trader’s point of view, however, the price of light, sweet WTI oil currently sits fairly solidly in no-man’s land.
In other words, until we either get price confirmation that this confluence support zone is holding or the price of oil solidly pierces lower and through this zone, a high-probability trade isn’t setting up. Should support fail, oil could target $84 and $80; should it hold support, the upside target again becomes $98.
From a seasonality point of view, oil has a tendency to rise during the April-May period, so I’ll be watching the $89.50-$90.50 support zone like a hawk.