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The Light Crude Oil Hits Crucial Support

08/29/11 01:08:02 PM
by Chaitali Mohile

The declining rally of the Light Crude Oil Index has retraced towards robust supports. Will the index surge or break support?

Security:   $WTIC
Position:   N/A

In October 2010, the Light Crude Oil Spot Price ($WTIC) underwent a bullish breakout. The index was trapped in a very critical range of 70 and 85 for about a year. The 200-day and 50-day moving averages (MA) had restricted the price action, resulting in a consolidation. A fresh uptrend was initiated by the breakout.

The average directional index (ADX) (14) was jittery during the consolidation in Figure 1. The blue oval shows equal buying and selling pressure as the price was moving in the tight range. After the breakout, the buying pressure sprang, pulling the ADX line above 20 levels. Thus, the fresh uptrend was developed. Eventually, the price moved higher to $115. However, the rally lacked the essential bullish strength. The small candlesticks highlighted the weak bullish force in $WTIC. The relative strength index (RSI) (14) failed to surge above 70 levels, indicating weakness in the rally. According to Figure 1, the oscillator had never sustained in an overbought area. Earlier, the RSI (14) was ranging in the 50 to 70 levels, suggesting the stable bullish strength that encouraged the index to maintain its bullishness on the price chart.

Graphic provided by:
Due to the descending RSI (14), $WTIC slipped from $115 to $95. The index lost 20 points in just one week. Thereafter, the price formed lower lows, breaching the 50-day MA support. Meantime, the developing uptrend reversed as the selling pressure rose suddenly, and the moving average convergence/divergence (MACD)(12, 26, 9) turned negative. The momentum indicator (MACD) has marginally breached the center line, signifying weakening momentum.

$WTIC has hit its major MA support, which is the 200-day MA. The index has been resting at this support for the past three weeks. Although the support line was breached during the trading session, all three candles are closing near the 200-day MA support. This shows that the index is likely to establish support. However, the plunging indicators in Figure 1 would show high volatility. The global financial markets are engulfed by the thick dark clouds of uncertainty, which could pull $WTIC down to the short-term low of $75.

Graphic provided by:
On the monthly time frame chart in Figure 2, $WTIC has two major supports. The Fibonacci retracement level at 38.2% is the first support for the current bearish rally. Second, the 50-day moving average (MA) has extended strong support for the index. We can see in Figure 2 that a pullback rally of the index was stuck in the support-resistance of the 50-day MA and Fibonacci retracement levels. The 61.8% levels obstructed the rally, suppressing it downward toward the lower levels. During the relief rally, the MACD (12, 26, 9) has turned negative, the relative strength index (RSI) (14) was reluctant to cross the 70 levels, and the trend indicator was weak. Therefore, the price rally failed to breach the 61.8% retracement level, and $WTIC began declining. Gradually, the index violated the 50% levels. All three indicators are highlighting bearish strength, which would keep the index in a tight trading range.

$WTIC would sustain the 50-day MA and 38.2% retracement levels in a very tough technical situation. The converging negative directional index (-DI) and positive directional index (+DI) are indicating volatile consolidation for $WTIC. Thus, the major supports on both time frames would prevent additional damage to $WTIC. The technical conditions on the chart suggest that the index is likely to establish support.

Chaitali Mohile

Active trader in the Indian stock markets since 2003 and a full-time writer. Trading is largely based upon technical analysis.

Company: Independent
Address: C1/3 Parth Indraprasth Towers. Vastrapur
Ahmedabad, Guj 380015
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