The price of oil has collapsed with the strengthening dollar and has reached levels that were last seen in the later stages of the financial crisis in 2008. This suggests that the current levels are deeply oversold both fundamentally and technically. The world economy is certainly slowing down but it is in a better shape than it was in the first quarter of 2009 when the US Crude Oil futures dropped to $33.35. Therefore, it makes sense to expect Crude Oil to be relatively close to the levels it could find a bottom.
Crude Oil, Daily 2009
Over the last 30 years it has taken in average 2 to 3 months for oil to bottom out after a major downside move. It would therefore be safe to assume that the bottoming process will provide us with plenty of opportunities to join the long side, or to scale into long positions thus lowering the timing related risks. In terms of price velocity the downward move seen over the last few months has been similar to the one seen in 2008. When this downside move finally ended the market moved sideways for a period of time allowing low risk entries at Bollinger Bands.
I mentioned some time ago in my S&P 500 analysis that the energy sector etf is forming a bullish wedge and that this would be confirmed by a breakout. Now the breakout has happened and we have a higher low in place. This obviously signals that the market participants are turning bullish on energy related stocks, a clear indication that they believe that the downside in oil is in their view limited.
Crude Oil, Weekly
The price of oil is close to the 2009 lows but is still inside a weekly downward trend channel. The latest reaction from a resistance level that coincided with the channel top was relatively strong. However, this kind of volatility is typical when prices get close to levels where the trend might turn. Last week the price closed inside the lower 1.5 stdv Bollinger Band for the first time since September 2014. The nearest support and resistance levels are at 43.58 and 53.60.
Crude Oil, Daily
Price has broken out of the descending regression channel and created a higher high. If we now get a higher low the bullish indication is rather strong but even a roughly equal low would mean that the buyers are gaining control in this market. Volatility has definitely increased which is not only evidenced by the higher high but also by the Stochastic indicator it has not been in overbought territory since July last year.
Crude Oil, 240 min
Price has retraced to 61.8% Fibonacci level that coincides with a descending trendline. Stochastic is oversold and the price is reacting higher from the lower Bollinger Bands.
The increase in volatility at levels that are close to the bottoming formation from 2009 is a reason to pay attention to the price action in Crude Oil in the near future. This is confirmed by the bullish breakout in the US energy sector shares ETF (XLE). If this turns out to be the range in which the market bottoms then the best levels to be a buyer are those that are close to the bottom of the range. However, the fact that so many technical tools indicate support for Crude Oil in the 4h time frame we could look for intraday buy signals in the general area of current price action.
Disclaimer: Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of purchase or sale of any financial instrument.
Chief Market Analyst