Based on the October 14th, 2013 Oil Investment Update
The previous week was quite hard for the oil bulls. Light crude lost almost 2% and slipped to its lowest level since July 3. When we take a closer look at the chart of crude oil we clearly see that the price of light crude remains in the narrow range between $100 and $104 per barrel. Since the beginning of the month oil bulls and bears have pushed it above or below the 38.2% Fibonacci retracement level, however, neither the buyers nor the sellers have had enough strength to win and trigger another bigger move.
At this point, it's worth mentioning that oil bears managed to push crude oil to its new monthly low of $100.60 on Friday, after the International Energy Agency warned in its monthly oil-market analysis that the U.S. fiscal crisis could harm demand and said that supplies were rising faster than previously thought. Additionally, the U.S. government shutdown deprived investors of important data on the oil market. Some oil market indicators were not published or may not be published because the agencies that publish them are affected by the shutdown in Washington.
Taking these circumstances into account, it seems that this would be another tough week for oil investors. Therefore, in today's essay we check where the nearest support zones and resistance levels are. Are there any technical factors that may have an impact on crude oil? Let's take a closer look at the charts in different time horizons and find out what the current outlook for U.S. crude oil is.
Let's start with a look at the monthly chart of light crude (charts courtesy by http://stockcharts.com).
On the above chart we see that crude oil still remains above the long-term declining resistance line based on the July 2008 and May 2011 highs (bold red line). However, light crude reached the long-term declining support/resistance line based on the September 2012 and March 2013 highs (the upper black line). Despite this downward move, there was no breakdown below this line (in terms of monthly closing prices) and crude oil still remains above it.
From this perspective, the picture is bullish and the breakout above these two long-term declining resistance lines hasn't been invalidated.
Now, let's zoom in on our picture of the oil market and see the weekly chart.
Looking at the above chart, we see that the price of crude oil declined once again in the previous week and dropped below the September low. In this way, light crude slipped to a new monthly low of $100.60 and closed last week below the August low. In spite of this downward move, the breakdown below this level is not confirmed at the moment.
As you can see on the weekly chart, crude oil almost reached the September 2012 top, which is a support level that may encourage oil bulls to act. If it happens, we will likely see a pullback to around $104. However, if it is broken, the next target level for the sellers will be close to $99.
From this point of view, the situation is still mixed.
Now, let's check the short-term outlook.
On the above chart, we see that the situation has deteriorated since our last Oil Investment Update was published. At the beginning of the previous week, after three unsuccessful attempts to move above the rising medium-term support/resistance line oil bears triggered a corrective move and tested the strength of the 38.2% Fibonacci retracement level once again. The price of crude oil dropped below $102 per barrel and slipped below the 38.2% Fibonacci retracement level. Although this deterioration was only temporary and light crude quickly rebounded, in the following days we saw more attempts to move below this level. Finally, oil bears won and closed the previous week below the 38.2% Fibonacci retracement level. However, the breakout is still not confirmed.
Looking at the above chart, we see that crude oil still remains in the declining trend channel. The upper line of this channel (based on the Aug. 28 and Sept. 19 highs - currently close to the $105.20 level) intersects with the medium-term support/resistance line and forms with it a strong resistance zone. Therefore, if the buyers manage to push the price above this resistance zone, we will likely see further growths. On the other hand, the above strong resistance may encourage oil bears to act. In this case, we may see a downward move to the lower border of the trend channel (currently slightly below $100). At this point, it's worth mentioning that in this area there is also the next support zone based on the 50% Fibonacci retracement level and the June high.
Summing up, although there was a downward move in the previous week, which took the price of light crude to a new monthly low, technically, the situation hasn't changed much in the short term. As long as there is no confirmed breakdown below the 38.2% Fibonacci retracement level further declines are unlikely. Please note that crude oil reached the long-term declining support/resistance line based on the September 2012 and March 2013 highs (the upper black line on the monthly chart) and almost reached the September 2012 top, which is a medium-term support level, which may encourage oil bulls to act and slow further declines.