Crude Oil Reversal Back Up Underway?

Aug 19, 2008: 1:30 PM CST

According to a few price calculations and support levels, odds have now shifted to favor a current possible short-term bottom for crude oil prices and a reversal to test higher levels – a technical development that comes at a time that gold has supported at similar levels and the S&P 500 is breaking down out of a daily trend channel.  Let’s focus for now on crude oil.

Crude Oil ($WTIC) Weekly Fibonacci Grid:

Taking the 2007 price low and projecting a Fibonacci retracement of the move to the 2008 highs, the following long-term Fibonacci retracement grid is created, which has the first level of support – the 38.2% retracement at $110.97, or roughly $111.00 per barrel.  The 38% retracement often provides initial support in an uptrend, which price clearly is in (despite a steep correction, on the longer time chart, we cannot deny the uptrend is still in tact).

Quickly – why is price still in an uptrend? Price is now making a higher low with a pullback after making a higher high.  Also, the moving averages remain in the most bullish orientation possible (20 above the 50 above the 200).

In addition to the possible support via Fibonacci, we have the 50 week EMA just below price at $108.89 (roughly $109 per barrel).  It would be quite impressive for price – after making such a large volatility price move down recently – could not find at least moderate support at these levels.

As if these levels were not enough to provide a solid case for a potential bounce, let’s look at additional confluence from the daily chart:

On August 4th, I published a post entitled “Crude Fails Test – Continues its Slide” in which I set a price target of roughly $110 per share, which was the ‘magnet trade’ or next zone of support via the daily chart.  Indeed price has now fallen just short of that $15 target and this current action can be considered a “test” of that level, meaning the 200 day moving average – currently at $110.20 – provides additional confluence for a strong and likely successful test of these price levels before mounting a possible reversal (however long lived) to the upside.

In terms of momentum, there’s also a clear positive momentum divergence forming, which often tends to precede price reversals.

To recap:

38% Weekly Fibonacci Retracement:  $111.00
Weekly 50 period EMA:$109.00
Daily 200 period SMA:  $110.00

All of which provide a confluence of possible support and price reversal at these levels.

Should price fail here, it would be a significant development.

Continue to look at your intermarket relationships, meaning gold also has found possible support (as I posted this weekend in the article “Is there Potential Support for Gold at These Levels?“, and the S&P 500 (and Dow Jones) are possibly breaking beneath a key rising support trend channel (mentioned in today’s post, “Market Gaps Through Support Trendline.

Keep a close eye on all these developments and critical areas, all of which are happening simultaneously – I’ll be sure to keep you all posted on these situations as they develop.

1 Comment

One Response to “Crude Oil Reversal Back Up Underway?”

  1. Richard Says:

    The USD/JPY fell on the US Government Inflation Report causing the dollar to fall to 76.74 and gold to gold to rise to $816.

    Also the EUR/JPY, FXE:FXY, is turning up and FXP and EEV look like they are peaked out.

    So part of my investment strategy is to go short PowerShares DB Crude Oil Dble Short ETN, DTO, tomorrow, as I believe oil is going higher.