WTI: Could we see a 20 handle this week

January 12, 2016

It has been a rollercoaster ride of a day for markets, starting with gut-wrenching volatility in today’s particularly low-liquidity Asian session. While US stocks see-sawed their way to modest gains today, breaking last week’s series of losses, the one constant in today’s trade was weakness in oil prices.

West Texas Intermediate (WTI) crude oil shed nearly two points from Friday’s close and while a $2 move would be barely notable with oil trading above $100, today’s move represents over a 5% drop for the commodity. As you’ve no doubt grown sick of reading, oil hit its lowest level in a decade, briefly peeking below the 31.00 handle before barely regaining that level in time for today’s close. The proximate cause for today’s selling, beyond the ongoing turmoil in China, was Morgan Stanley’s conclusion that “$20-25 oil price scenarios are possible” as a result of the dollar’s strength. Whether the proclamations of the world’s always-late-to-the-party megabanks can be taken as gospel truth is up for debate, but it’s clear that traders are latching on to any excuse to sell so-called “black gold”

…So where could the selling stop?

With all the crosswinds of market sentiment, intermarket correlations, and short-/long-term fundamentals at play, technical analysis may provide the cleanest outlook for oil. As we go to press, oil is approaching the bottom of its 3-month bearish channel, confirming that sellers remain in control over the medium-term horizon. The fact that the MACD indicator is once again trending lower below its signal line and the “0” level confirms this bearish outlook.

That said, there is a key support level upcoming where bulls may try to make a stand. Just below the psychologically-significant 30.00 level that many analysts are watching, the 161.8% Fibonacci extensions of the last two notable bounces (March-May and August-October) converge in the 29.30-29.60 zone. With the RSI indicator already deeply oversold, a bounce from this support area later this week would not be surprising. However, even if we do see a sizable bounce in WTI, the medium-term outlook will still favor the sellers as long as oil holds below the top of its bearish channel near 35.00.

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