Dissector: Crude at medium term resistance

Light crude oil (closed at $87.2 a barrel) has been trending upwards in a long-term uptrend since bottoming out at around $32 in the first quarter of 2009. The commodity's sideway consolidation between $70 and $85, from October 2009 till November 2010 was promising from a long-term perspective. Subsequently, the commodity broke through the upper boundary of the consolidation range and accelerated higher until it encountered resistance at around $115 in early May. However, triggered by negative divergence in daily moving average convergence divergence and price rate of change indicators and weekly relative strength index, the commodity did a volte-face after marking its 2011 high at $114.8 levels. Light crude started its downtrend by tumbling steeply this May and was on a medium-term downtrend since then.

After retracing 50 per cent Fibonacci retracement level of its up move between early 2009 and May 2011, light crude found support at around $75 in early August and bounced upwards. This level is also a significant long-term support level for the commodity and is a significant trend deciding level. It will face resistance at its long-term resistance band between $97 and $100. Emphatic breakthrough of this key resistance band can take the commodity higher to $115 and then to $125 in the long-term. On the other hand, failure to move above the aforesaid resistance band will pull light crude down to $80 and then to $75 levels. Decisive weekly close below significant long-term support and trend deciding level at $75 will mar the commodity's structural uptrend. In that scenario, the commodity can trend downwards to $65 or even to $55 in the long-term.

Medium-term view

The commodity has been on a medium-term downtrend since early May. While trending down, it emphatically breached its moving average compression (21-, 50-, 200-day moving averages) at around $95 in early August this year and the commodity plunged sharply thereafter to $75 levels. It is currently facing twin resistance at around $92, a key intermediate-term resistance and medium-term down trend-line. Strong breach of this resistance will take the commodity northwards to $95 and then to $100 in the ensuing weeks.

Only a conclusive jump above its key hurdle at $100 will reverse the downtrend and will pave way for a rally to $105 and then to $115 in the medium-term. Inability to surpass its twin resistance at $92 can pull the commodity down to $85 and to $80 in the same time period.

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