Crude Charges Into Resistance

03/29/07 10:45:57 AM

by Arthur Hill

Even though the recent surge in oil shows tremendous strength, crude is quickly becoming short-term overbought and entering a resistance zone.

Security: $WTIC
Position: Hold

On the daily chart (Figure 1), West Texas Intermediate Crude (WTIC) is entering a resistance zone from the 200-day moving average and the October–December 2006 highs (Figure 1). Oil formed a large consolidation last year with support at 58 and resistance at 64. The consolidation breakdown was bearish, but crude rallied all the way back to the October–December highs. This rally is impressive, but resistance around 64 is just as impressive because this area stymied WTIC in October, November, and December.

FIGURE 1: WTIC, DAILY. Here, West Texas Intermediate Crude is entering a resistance zone from the 200-day moving average and the October–December 2006 highs.

Graphic provided by: StockCharts.com.

In addition to resistance, the stochastic oscillator moved above 80 and became overbought. This is not necessarily bearish; it just warns bulls that prices have moved far and fast in a short time frame. The indicator is both bullish and overbought as long as it remains above 80. A dip below 80 would show some weakness, and a dip below 50 would be short-term bearish for WTIC. The 50 level is the centerline for the stochastic oscillator, and this separates a bullish bias from a bearish bias. Momentum is generally bullish above 50, and momentum is generally bearish below 50.

FIGURE 2: WTIC, WEEKLY. WTIC broke below this moving average with a sharp decline in the summer of 2006 and this average now becomes resistance.

Graphic provided by: StockCharts.com.

Now let's turn to the long-term chart for some perspective (Figure 2). Instead of the 200-day moving average, I overlaid the 40-week moving average. This covers the same time frame (40 weeks multiplied by 5 days = 200 days) and is essentially equal to the 200-day moving average. The 40-week moving average offered support throughout the multiyear advance. WTIC broke below this moving average with a sharp decline in the summer of 2006, and this moving average now becomes resistance. WTIC moved back to this moving average over the last few weeks, and I would expect resistance and/or a pullback soon.

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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