Oil Hits A Resistance Zone

04/25/07 08:34:12 AM

by Arthur Hill

West Texas Intermediate Crude is currently enjoying a nice rally, but the advance has reached a resistance zone and further gains could be difficult to come by.

Security: $WTIC
Position: N/A

West Texas Intermediate Crude (WTIC) broke key support at 68 with a sharp decline in the second half of 2006, setting the bearish tone for the long-term trend (Figure 1). The drop from 80 to 51 was no ordinary decline, as WTIC returned to levels not seen since the first half of 2005.

FIGURE 1: WTIC, WEEKLY. West Texas Intermediate Crude broke key support at 68 with a sharp decline in the second half of 2006. The decline extended into early 2007 and formed a falling price channel (gray lines).

Graphic provided by: Telechart 2007.

The decline extended into early 2007 and formed a falling price channel (Figure 1, gray lines). The channel breakout around 60 is medium-term bullish, but I view this as a countertrend rally. The decline to 51 created an oversold condition that can only be alleviated with a bounce or a consolidation. WTIC chose to bounce back with a move back above 65. The move looks impressive on the daily chart (Figure 2), but the advance pales relative to the prior decline (80 to 51). The move retraced 50%–62% of the prior decline and met resistance just below broken support. This is where we would have expected a corrective rally to fizzle, and WTIC stalled the past few weeks (gray circle).

Even though the current rally looks like a corrective advance, the medium-term trend remains up and we should respect this trend as long as it holds. The advance over the last few months carried oil back above the 50-day and 200-day moving averages. The move formed a rising channel, and there is a reaction below 61.35 earlier this month. A move below the lower channel trendline and support at 61.35 would reverse this uptrend and call for a continuation of the previous decline (80 to 51 on the weekly chart). I would then expect a move below 51.

FIGURE 2: WTIC, DAILY. Even though the current rally looks like a corrective advance, the medium-term trend remains up.

Graphic provided by: Telechart 2007.

I am also focusing on the relative strength index (RSI) for evidence of a trend change. The indicator bottomed in mid-January and has been rising the last few months. The RSI moved above 70 in late March and formed a lower high in April. WTIC actually forged a higher (closing) high in April, and the RSI now has a negative divergence working. Despite waning momentum (in the RSI) in April, the overall trend remains up as long as support at 50 holds. A break below 50 would turn momentum bearish, and this could be used to confirm a support break in WTIC.

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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Oil Hits A Resistance Zone

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