Crude Oil Situation Bears Watching

Since our last technical update on crude oil, it has now settled into a less bearish falling channel pattern (see chart below). While the $67.50 per barrel support was broken, it did not bring out about the reactive forces that we were expecting. Some pent-up demand was able to keep oil in a controlled range for now. Better than a move towards the $60 level which would have panicked a large chunk of people who have bought into this rally (given this will be a break below the 130-day MA). For now the channel range dictates that support be at $64.40, and resistance be at $71.30.



So what's the best case scenario for oil? If prices hold above the 65-day moving average of $68.60 for the next few days, it could embolden a lot more of those who have bought on the past dip. We might then see a breakout from our current consolidation range. If $65 wasn't able to hold as it did, we wouldn't have this best case scenario. So the fact that we have this pattern brewing is a vote of confidence on oil.

On the other hand, a move below $68.60 would put the 130-day MA in threat again and this time the buyers might not be there to step in. A break below the 130-day MA is the worst case scenario. Given the chances of oil moving either way and its ability to derail or fuel investor hopes for a global economic recovery, we should monitor this situation closely. Also keep note the high exposure of the S&P 500 to oil-based earnings. On a personal bias, the possibility of a US dollar rally is something that keeps me doubtful of a breakout in oil in the short-term. But for the meantime, let's reserve judgement and let the crude oil price tells us where its going.