A Rounding Top
The oil market has staged a stunning rebound since hitting the lowest level in so many years I can’t remember when. The market has been fueled by rebounding sentiment and reopening economies despite what are still high levels of supply and storage. Although the economic reopening is underway the outlook for demand is still tepid. When all boiled down, the supply and production capacity are enough to keep pace with demand for the foreseeable future. What this means for traders, I say traders because no one should be long oil without a downside strategy in place, is that the uptrend may be over.
The technical outlook for oil is highly questionable. At face value it may appear as if a rising triangle is forming but that is not the case. What I see is a rounding top that is supported by the indicators. The rounding top is characterized by a slow diminishing of bullish activity countered by rising activity among the bears. The price action forms a clearly rounded pattern that, once confirmed, inevitably leads to lower prices. A look at the chart of WTI to my eye is such a chart. Notably, within the pattern, you can see WTI makes a series of higher highs where the magnitude of each high gets smaller and smaller until the last two are more or less even.
The indicators are what makes this pattern so telling. If the indicators were consistent with support or were converging with the highs in a bullish way that would be different. What we have here are inverted indicators, indicators showing bearish signals while price action moves higher, and that spells doom for oil. The bears are in charge of this market and waiting to take a swipe. What traders need to watch out for is the first big down draft and use that as a starting point for a series of bearish trades.
When price action gets below the short-term 30-day moving average the selling could get fierce. At that point, the odds of a move to the $30 and $25 levels become highly probable. The risk for bulls is that, in the medium to long-term, WTI is more likely to retest the $15 level than the $50.