Technical Analysis: WTI Crude Oil – Expect some softness, but long-term uptrend intact April 27, 2018

  • The long-term trend has turned upwards with WTI Crude Oil closing above the 60-month moving average for the past four months
  • Expect a long-squeeze in the near-term where a selloff to the $65 to $60 range, based on the extreme long positioning in the net-speculator space
  • The $70 psychological round number resistance should act as a near-term top for now

Tradable instruments:

ETF:
US Oil Fund LP – (AMEX:USO)
The United States Oils Fund holds near-month NYMEX futures contracts on WTI crude oil. This ETF delivers its exposure to oil using near-month futures.

CFD:
US Oil USD100 CFD – USOIL.IX
UK Oil USD100 CFD – UKOIL.IX

Long-term outlook dependent on 60-month MA

For the long-term trend, we will be using the monthly timeframe chart and the 60-month moving average to determine the long-term trend. Notice how reactive WTI Crude oil is to the 60-month moving average since June 2009 shown by the grey highlighted areas. There seemed to be a special relationship between them, making the 60-month moving average a crucial signal to watch. A general rule of thumb for the existing uptrend to remain intact is to have price staying above the 60-month moving average, vice versa.

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Red line = 60-month moving average

For example, after WTI Crude oil price closed above the 60-month moving average ($67.80) in June 2009, the uptrend was confirmed. The subsequent moves higher were all supported by the 60-month moving average shown by the grey highlighted areas. This was despite some intra-month lows below the 60-month moving average. The closing price for the month is all that matters. In total, there were 19 occasions where the 60-month moving average defended the uptrend successfully. This pattern lasted until September 2014 where the sellers finally succeeded in closing price below the 60-month moving average ($91.37). As a result, the prior uptrend was reversed to the downside significantly. It took the bears a whopping five years before shifting the trend around to the downside shown by point 3 in the chart.

With the benefit of hindsight, the past few months of the rally in has lifted the WTI Crude oil closing price above the 60-month moving average since January 2018 shown by the yellow highlighted box.

Put differently, WTI Crude oil has succeeded in closing above the pivotal 60-month moving average for the past four months confirming the long-term trend has shifted to the upside. However, do note that within the long-term trend, there can also be opposite near-term trend. We are expecting a conflicting near-term trend to play out first before the long-term uptrend continues.

Near-term outlook – extreme long positioning in the speculator space

Since, February 2018, WTI Crude Oil has been moving in an uptrend steadily, resulting in the Relative Strength Index (RSI) reaching overbought condition soon, currently at 62. RSI measures the general strength of the momentum. A reading above 70 represents overbought condition while a reading below 30 represents oversold condition. Historically, when the RSI exceeds the 70 overbought region, a mean reversion or sharp reversal is not too far away for the WTI. This is in line with the extremely crowded long bets the market is currently positioned based on the Commitment of Traders (COT) report.

Figure 2:  WTI Crude Oil Weekly Chart – long squeeze imminent

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*Highlighted areas demarcate the point when the long squeeze occurred

About the author

Profile photo of Jeremy Ng

Jeremy Ng
Research Analyst
Phillip Securities Research Pte Ltd

Jeremy specialises in Technical Analysis and has 10 years of experience in studying price action. His areas of expertise include intermarket analysis on the equities, currencies, commodities and bonds market.

He is also a regular columnist on The Business Times - every Monday ChartPoint column.

He graduated with a Bachelor of Science in Banking and Finance from University of London.

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