WTI: Evening Star Shows Sun is Setting on Last Week's Bounce

One of our persistent biases last week was that the US Dollar rally was due for a breather after strengthening dramatically over the previous few weeks. That theme played out nicely in some markets (USDJPY, USDCAD, AUDUSD, Gold and Oil), but failed to develop in other markets (EURUSD and USDCHF). Regardless, the scene may now be set for another leg higher in the greenback across the board, assuming this week’s high-impact US data cooperates.

One of the most actionable setups at this point could be in WTI, which is in freefall today after bouncing back to 96.00 last week. As we noted two weeks ago, a multi-month Head-and-Shoulders pattern suggests that the commodity could still see further downside toward 90.00 over the medium-term (see “WTI: Could Oil Hit its H&S Target at 90.00?” for more). More immediately, prices are putting the finishing touches on a clear Evening Star candlestick pattern; this relatively rare 3-candle reversal pattern shows a shift from buying to selling pressure and is often seen at near-term tops in the market.

Beyond the price itself, the other technical indicators are also painting a bearish picture. Last week’s bounce stalled out directly at the shallow 23.6% Fibonacci retracement and the downward-sloping 20-day MA, which has consistently put a cap on oil over the last two months. Meanwhile, the MACD remains well below the “0” level, showing generally bearish momentum, while the RSI has bounced out of oversold territory, potentially opening the door for another leg lower from here.

To the downside, bears may look to take the pair back to the August lows at 92.50 next. If bears can maintain the upper hand, the 16-month low at 91.25 and the H&S measured move target near 90.00 could come into play later this month. On the other hand, bulls likely want to see if WTI can regain its 20-day MA and the 96.00 handle before committing to medium-term buy trades.

* An Evening Star candle formation is relatively rare candlestick formation created by a long green candle, followed a small-bodied candle near the top of the first candle, and completed by a long-bodied red candle. It represents a transition from bullish to bearish momentum and foreshadows more weakness to come.

Source: FOREX.com