WTI Oil Forecast: Looking toppy, but downside limited

Having spent last week trading sideways, WTI Oil is finally turning over in favor of the bears. As of writing, the front-month contract is trading at 20 cents or 0.30 percent lower at $56.62/barrel.

The stellar rally from the June low of $42.06 could be attributed to the global output cut deal and tightening US markets. Recently, the consolidation of power in the Kingdom along with rising tensions between Saudi Arabia and Iran also added to the bullish tone in oil prices.  

However, the rally seems to have stalled ahead of the Nov. 30 OPEC meeting despite the widespread belief that the cartel and other major producers will extend the output cut deal beyond 2018.

The technical studies show short-term bull market exhaustion...

4-hour chart

Source: Netdania

Key Moving Averages and Trendline levels

  • The 50-MA support stands at $56.41
  • A trend line drawn from the Oct. 26 low and Oct. 27 low is seen offering support at $56.15 levels
  • A trend line drawn from the Oct. 20 low and Oct. 26 low is seen offering support at $55.00 levels

The chart above shows prices have suffered a downside break of the sideways channel pattern. Also, prices have re-entered the rising channel defined by the trend line drawn from the Oct. 16 high and the Oct. 30 high and the line sloping upwards from the Oct. 9 low and the Oct. 20 low.

Momentum studies - The RSI has turned bearish and trending lower. The 5-MA and the 10-MA are curled lower in favor of the bears. However, the ascending 50-MA, 100-MA and 200-MA signal the losses are likely to be short-lived.

Daily chart

Source: Netdania

  • As can be seen in the chart above, the 5-day MA has topped out, although the 10-day is still sloping upwards.
  • The chart also shows the bullish 100-day MA and 200-day MA crossover. The long-term moving average crossovers initially tend to work as a contrarian indicator.

View

  • Prices look set to take out $56.15 and test $55.00 levels, courtesy of bearish turnaround on the 4-hour chart and confirmation of long-term moving average crossover (lagging/contrarian indicator) on the daily chart.
  • However, the losses are likely to be short-lived, courtesy of the upward sloping moving averages as discussed above.
  • On a larger scheme of things, only a sustained move below the support offered by the trendline sloping upwards from the Oct. 9 low and Oct. 20 low would signal a bearish trend reversal.

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