Just under 6 weeks ago we discussed the potential for Brent to test the $36.80 and $39. It sounded far-fetched at the time but sentiment (which has already been overly bearish) and the technicals suggested this to be the higher probability move.
Fast forward a few weeks and we have seen Brent exceeded the latter target and test a high of $49.75 before rolling over. Part of the rally from the $27.42 lows can be explained by a weaker Greenback. However when you compare the velocity of the gains seen from Oil and WTI with the losses of Greenback strength you'll see there is far more behind this move than a USD sell-off. Indeed throughout March commodity markets and risk have rebounded strongly, with energy in particular making a notable bullish rally. Gasoline has rebounded just under 45% in March alone; meaning is 'only' down 18% for the year. It has been a volatile Q1 for 2016 indeed but we now have to question if the moves seen throughout March are over-stretched.
Whilst large speculators remain net long (at their highest ratio since June '15) it should be noted the bullish rally was fuelled mainly by short covering, not new bulls joining the market. This is an important point because there will now be bears on the sideline waiting to re-enter below key resistance levels. If we break key levels listed below then expect these participants to help it down.
Gold, Oil and AUD have moved in lockstep throughout March as the correlations between them have been very strong, yet all of these markets have (or are about to) reach obvious levels of resistance. This makes these markets susceptible to a retracement as traders book profits, pre-emptive bears join in and all participants keep an eye on the correlations as if one of these markets stalls, others may follow.
Brent's high around $42.95 coincided with the prominent swing low in August '15 and also confirmed a third touch of the upper bullish channel. The bullish channel alone suggests the trend remain intact and that we are merely experiencing a correction from the highs. As long as we remain above the lower channel we can assume the trend will eventually break, so we can monitor for basing patters to form at key support.
One such level is $38.73, but looking at how price has declined from the highs (and the short to medium-term MA's have curled downwards) my guess is this level will eventually break to the downside, where the 50% and 61.8% fib levels may provide support, along with the bullish channel.
If we are to see a break below 61.8% and / or the lower trendline then $32.30, $32.40 and of course $30 become likely targets. However at this stage I do not expect oil to trade back in the $20-$30 range, making any downside moves appetising to longer-term bulls.
So whilst I noted we have bears on the sideline ready to re-join the party, we should also note the lack of bullish participation during the prior rally, who may be itching to get involved at lower levels and keep Brent above $30.