WTI: Why The Improvement?

A few weeks ago, we noted how traders were beginning to take the uptrend in US equities as an inevitability, on par with Benjamin Franklin’s famous quip about “death and taxes.” Not surprisingly, the assumption of a perpetual, uninterrupted rise in stocks has been proven false over the past few weeks, but traders have now grown accumstomed to a similarly strong downtrend in oil prices. We suspect that this strong trend is also vulnerable to an abrupt, unexpected reversal in the near term.

Focusing in on West Texas Intermediate (WTI) crude oil, prices have fallen from a peak above 107.00 in mid-June all the way down to trade below 80.00 earlier this week. Despite the persistent drop, there are some nascent signs that the market may be turning higher ahead of the weekend.

Most importantly, oil appears to be stabilizing at a key support level over the last few days. The 80.00 level represents an important psychological level of support, as well as the 161.8% Fibonacci extension of the H1 rally. Furthermore, the pair put in a large daily Bullish Engulfing Candle* off that floor yesterday, signalling a big shift from selling to buying pressure.

The secondary indicators, on the other hand, are painting more of a mixed picture. The MACD continues to trend lower below its signal line and the “0” level, showing strongly bearish momentum, though the RSI indicator is bouncing back from oversold territory, hinting that a bigger bounce may be seen in the coming days.

From a fundamental perspective, there are no specific news catalysts that are driving black gold higher; instead the rally is being driven by a broad improvement in risk appetite and short covering, similar to global equities. For that reason, the rally may be relatively short-lived, though aggressive bulls still may look to target the Fibonacci retracements of the October drop, including 85.50 (the 38.2% retracement) and 89.10 (the 61.8% retracement). That said, the longer-term bias in WTI will remain to the downside as long as previous-support-turned-resistance in the 90.00-91.00 area holds, and swing traders may look at bounces toward that zone as opportunities to fade the counter-trend rally next week.

• A Bullish Engulfing candle is formed when the candle breaks below the low of the previous period before buyers step in and push rates up to close above the high of the previous candle. It indicates that the buyers have wrested control of the market from the sellers.