Crude Oil Fails Test – Continues its Slide

Aug 4, 2008: 6:43 PM CST

In good news for the broader economy and US Stock Market, crude oil prices failed a critical test of the crossovers of its key 20 and 50 period moving averages, and now could be headed lower for a support test of its rising 200 day moving average.  Let’s see this recent development on the charts:

Crude Oil ($WTIC) Daily:

By “critical test,” I mean that significant overhead resistance has now formed at the $130 level, which now represents the crossunder of the 20 period EMA to the 50 period EMA, which has set up what some call a “hot, wet blanket” trade (the imagery is that the moving averages halt upward movement like a hot, wet blanked would).

A long-legged, spinning-top style candlestick formed at this level, as sellers quickly overtook buyers at this zone – buyers have had little luck since early July in pushing crude oil prices higher.  Perhaps it is concerns over a deeper economic slowdown or increasing supplies or some combination thereof, but the charts appear to be forecasting the potential for lower prices yet to come.

The momentum oscillator registered a new momentum low in mid-July, setting up the “Impuse Sell” trade (when price retraced to the key 20 period EMA), and we could be set for a test of the rising 200 day moving average as a line of defense for the buyers.

Also, on the weekly chart (not shown), prices have now violated (crossed beneath) the key rising 20 week EMA, signalling a bearish turn-around.

Let’s continue to watch this chart for signs of further weakness – and weakness in Crude OIl could translate into a (temporary or longer) boost in the broader equity markets.

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