Market Strategy

Dissector: Light crude oil under pressure

Yoganand D. | Updated on October 06, 2012 Published on October 06, 2012

Light sweet crude oil slipped $1.83 or almost 2 per cent to $89.88 a barrel on the New York Mercantile Exchange, finishing a week of huge price swings. These swings were due to the threat of gasoline supply problems and refinery maintenance shutdowns which raised concerns regarding oil demand. For the week, crude oil declined 2.5 per cent and has fallen 9.2 per cent from a recent peak of $99 a barrel recorded in mid-September.

Light crude oil’s long-term base in the band between $75 and $77 halted it in June this year and crude oil stated to move higher. However, it encountered resistance at $100 in mid-September, which is a significant resistance level. Crude oil’s long-term trend stays up as long as it hovers above the aforesaid band. This base level overlaps with the 50 per cent Fibonacci retracement level of its up move between early 2009 and May 2011. Only a decisive weekly fall below $75 will mar its long-term uptrend and pull crude oil down to $65 and then to $55 in the long-term.

Crude oil has significant long-term resistance in the range between $97 and $100. Conclusive rally above this resistance will reinforce the bullish momentum and take the commodity higher in the long-term to $115 and $125.

Since its earlier peak in March this year at $110.5, the light sweet crude oil has been on medium-term downtrend. Following a rally in mid-September, crude oil encountered resistance in the band between $97 and $100 and failed to surpass this trend-deciding level. Negative divergence in the daily moving average convergence divergence indicator and the presence of significant resistance around $100 were the causes for its failure.

Further, the formation of a bearish engulfing candlestick pattern around $100 in the daily and weekly charts also helped crude oil reverse downward. For the past three weeks, crude oil has been trending downwards. On September 19, crude oil tumbled 3.5 per cent, breaching its 200 as well as 50-day simple moving averages. It is hovering well below them.

Crude oil has immediate support around $87; a fall below this level will pull it down to $85 and then to $83 in the short-term. An emphatic decline below $83 will drag it down to $75 in the medium-term.

On the other hand, light sweet crude oil has resistances at $93 and $95. Strong jump above the second resistance will take it higher to $97 and $100 range in the medium-term.


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