There are tentative signs that crude oil prices could bounce back today after falling for 5 consecutive and 9 in the past 11 days. As well as oil prices being oversold, bearish speculators may reduce their exposures ahead of the weekend. What’s more, the Energy Select Sector SPDR ETF (XLE) has actually held its own relatively well in the past couple of days. This divergence is definitely noteworthy given that the XLE has led WTI prices many times recently as highlighted on the chart.
The XLE created what may be considered as a potential reversal candlestick price pattern on Wednesday and it closed higher on Thursday. Oil prices on the other hand have weakened sharply during this period. So are speculators in the oil ETF wrong or those in actual oil futures? Judging by the chart, it could be argued that the selling in oil prices may have been overdone a little. But with that record rise in weekly US oil stocks and not to mention the OPEC shenanigans, who could blame oil traders for feeling so bearish?
Now looking at the 4-hour chart of WTI we can see that US oil prices have pulled back quite sharply to a previous key support and resistance area between $44.10-44.35. While I am not suggesting that prices will bottom out here, there is an increased likelihood that we will see a bounce of some sort. Already, WTI has bounced off its lows from this $44.10-£44.35 range and it has climbed back above Thursday’s low. Momentum-based traders may also notice the positive divergence on the Relative Strength Index (RSI) which has also drifted below the ‘oversold’ territory of 30.
Thus, the short-term technical indications do point to a bounce in oil prices. If prices do go up, traders will then need to watch the reaction around some short-term resistance levels in order to gauge the strength of the bounce. For example, if a resistance level like $44.95/45.00 breaks down with ease then this would point to a more decent recovery than a mere dead-cat bounce. Conversely, if oil prices spend a long time trying to recover but fail to convincing move higher then that would be bearish. In this case, the RSI and other oscillators will move higher from these low levels through time rather than price, meaning that momentum traders would also no longer interpret prices as being oversold even though they have failed to bounce back meaningfully.
In any case, this potentially short-term bullish outlook will become invalid if the support level at $44.10 breaks down and price holds below it. If this were to happen then the prior low around the $42.70/5 area would become the next bearish objective.