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TECHNICAL ANALYSIS


A Major Confluence Of Support For Crude Oil

11/03/04 03:44:40 PM
by Kevin Hopson

Light sweet crude is approaching a key support zone, which could act as a significant reversal point for prices.

Security:   $WTIC
Position:   Hold

The continuous futures contract for light sweet crude ($WTIC) has seen a 10% drop from its October high. However, despite the recent decline in price, the long-term technical picture continues to be bullish. For example, note how the contract has pulled back to October's double-top breakout point around the $49.50 level, as illustrated by the dotted green line. Prior resistance levels tend to act as support because those traders who sold resistance ($49.50) will be looking to get back in at the same price. Prices have also filled the gap from early October, as illustrated by the red circle. With the contract's 50-day moving average ($49.24) just below, prices should find key support in the $49.25 to $49.50 range.

Even if this price range fails to hold, there is another confluence of support around the $48.00 level. More specifically, note how the top parallel line of the black pitchfork is converging just above the $48.00 level. This trendline, which previously acted as resistance, should turn into support if and when it is tested. Also coming into play here is June's uptrend line, as illustrated by the solid green line. Prices have remained above this trendline for the past four months. If that is not enough, there are a couple of key Fibonacci retracements around the $48.00 level. For example, the 50% retracement level ($48.29) from the August to October rally and the 38.2% retracement level ($47.97) from the June to October rally both come into play here.

Figure 1: Oil light crude, continuous contract
Graphic provided by: StockCharts.com.
 
From a sentiment standpoint, option open interest in the front-month (December) futures contract could also lend support to prices. More specifically, put option open interest exceeds call option open interest by a significant amount at both the $48.00 and $49.00 strike prices. This is important because the sellers of these put options will want to keep oil prices above the related strike prices so the contracts are not exercised. To accomplish this, put sellers will likely buy futures contracts around these strike prices, thus providing support here. Given the major confluence of support in the $48.00 to $49.50 range (based on technicals and market sentiment), I would look for a potential bottom reversal here in the near term.



Kevin Hopson

Kevin has been a technical analyst for roughly 10 years now. Previously, Kevin owned his own business and acted as a registered investment advisor, specializing in energy. He was also a freelance oil analyst for Orient Trading Co., a commodity futures trading firm in Japan. Kevin is currently a freelance writer.

Glen Allen, VA
E-mail address: hopson_1@yahoo.com

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