Technical Analysis: Is Crude Ready To Run Over $100?
Remember that potentially explosive chart of West Texas Intermediate (WTI) crude I showed you a few days ago?
Well, it’s about to get even more interesting.
But before I show you what’s in store for crude trading this week, let me quickly recap the long-term technical chart…
As you can see in the weekly chart above, WTI crude is slowly consolidating into a tight and defined range. The blue lines connect the market highs and lows since 2010- 2011. And as you can clearly see, they’re coming to a “point”.
What does it mean?
Price consolidation occurs when investors become increasingly indecisive. Bulls are unwilling to prod prices higher while bears are hesitant to push prices lower. And the more indecisive investors become, the tighter the price range of the market in question.
But here’s the deal…
At some point, investors pick a side. And when they do, the market usually reacts with a big price move. In multi-year consolidations like you see in the chart above, it’s not uncommon to see a market move equal to the width of the widest part of the consolidation.
In crude’s case, that could be a $20 to $30 price adjustment in the not-so-distant future.
Now, let’s take a look at a shorter-term chart…
As you can see, WTI made a large jump in late April and early May. But more importantly, the recent run to $96 a barrel came in the face of bearish fundamental data.
You see, the US is virtually swimming in oil right now. In fact, crude inventories are at their highest levels since the Energy Information Administration (EIA) began keeping track of this data in 1982.
This enormous build up of supplies mixed with the fact that US production is set to increase even further should bring prices down.
But it hasn’t…
As a matter of fact, crude finished last week’s trading at the top of its range (red line) near $96. A push higher into the $98 area this week, and the consolidation pattern shown in the first chart will trigger bulls into action.
At that point, we could see oil start rising over the all-important $100 a barrel mark.
Now let’s be clear…
I realize the scenario of quickly rising oil prices seems unlikely right now. With inventory levels high and US production surging, it’s unusual that crude is trading in the mid-$90 range to begin with. A more appropriate price would be in the mid- $80s.
But don’t forget, the summer driving season is almost here. That means gasoline demand is set to surge, which will take a big bite out of the US crude supplies in coming months.
We also have Middle East tensions coming to a boiling point. I won’t go into all the details today, but the situation overseas isn’t exactly what you would call peaceful.
How can you capitalize on a rising crude price?
One way is through the US Oil Fund (USO). USO is an exchange-traded fund that tracks the day-to-day price moves in WTI crude. If the price of crude runs higher, USO will follow in its footsteps.
But let me forewarn you…
This is a trade for experienced and nimble traders only.
After all, if there’s an outbreak of bearish US economic data in coming days, the price of crude could fall from the $96 resistance area (red line) just as easily. In such a case, the United States Short Oil Fund (DNO) will be the place to go for oil market profits.
Until Next Time,
Justin Bennett
Category: Commodities, Technical Analysis
