Technical Analysis: Get Ready For The Next Crude Rally!
No doubt about it, it has been an ugly few weeks for West Texas Intermediate (WTI) crude. The commodity has plunged nearly $8 a barrel since mid-July. The hefty 7% downturn has WTI trading at $97, which is the lowest price since February.
Why such a heavy pullback?
Despite ongoing geopolitical worries, investors seem more concerned with growing US production. According to the Energy Information Administration (EIA), US oil production surged to 8.3 million barrels a day in May 2014- the highest level since 1987.
What’s more, analysts see production jumping to an average of 9.3 million barrels a day in 2015- the highest rate since 1972.
Without question, growing US production will remain an oil market headwind for quite some time.
However, that doesn’t mean bulls should run for the hills just yet…
As you can see from this long-term chart, there’s a very strong technical uptrend line (green line) in WTI. Each time the commodity dropped to test this important support level in recent years (red circles), buyers returned to push it aggressively higher.
Will buyers step in again this time?
Given the strength of this support level, I’d be surprised if WTI doesn’t rally substantially in the very near future.
But let me be clear…
If crude drops below $95 in coming days, there’s a growing likelihood of a washout. In other words, if the green trend line is broken, it could initiate a cascade of selling as long-term bulls throw in the towel.
At that point, I wouldn’t be surprised to see WTI drop to $90 a barrel or lower.
How do you capitalize on the situation?
The easiest way to play a looming crude rally is with the US Oil Fund (USO). Watch for signs of intense buying in the $36 area. If bulls step in like I believe they will, we’ll likely see a snapback rally to the $38 area in USO.
On the other hand, if sellers overtake the oil market in coming days, look to the US Short Oil Fund (DNO). This inverse oil ETF rises when the price of crude falls. If the commodity washes out below $95, DNO could make a run for the $35 area.
Until Next Time,
Justin Bennett
Category: Crude Oil, Technical Analysis
