Falling Wedge, But Can Bulls Force A Reversal?

WTI Crude Oil Talking Points:

  • Oil prices ended last week setting a new six-month low, testing below the $87.50 level.
  • After a rebound on Monday, sellers returned this morning to temper the move. The big question now is whether the bulls can break through a major area of ​​prior support-turned-resistance sitting overhead.
  • The analysis contained in the article is based on price action and graphic formations. For more on price action or chart patterns, see our DailyFX Training section.

Oil prices have taken on added importance in 2022. The year started with fear as the Russian invasion of Ukraine helped create a spike in February, down to the 130 handle for WTI. This was less than two years after the negative price debacle, when in April 2020, the WTI of the first month fell below the zero level and drove up to -40.32. By March 2022, oil prices had more than recovered and reached a new 13-year high.

As a technical analyst, the negative price scenario is something that still gives me a headache. These prices traded, so it is valid. But that was a supply-side issue and not necessarily indicative of the price of crude at the time, as next month’s futures set a low of 17.27 (ticker: CL2). And it’s not like there’s a lot price action trends below zero as it was a one-day deal that was largely relegated to falling in price towards contract expiration. It just ended like a elongated wick on the weekly charts. For a while I just relied on this CL2 chart as it seemed more valid to me. But, if I analyze CL1, using CL2 is not an adequate substitute, especially for matters of short-term interest.

I bring all this up to highlight how much longer-term crude studies can keep moving given negative pricing in April 2020. So I’m going to start with a longer-term chart and then drill down into studies in the shorter term. which are less dependent on data going back to this “incident” of April 2020.

In the monthly chart below, there are two notable takeaways. The first is the support zone from October 2011 to May 2013. This was an area that held up for quite a considerable period before oil prices fell in the fourth quarter of 2014. The bottom of this zone even came back as resistance in October. of 2018, after which a bearish engulfment printed before a drop to new yearly lows. And the second is the March 2022 high, which only came down 64 cents from the 161.8% Fibonacci Projection of this negative price movement. This is relevant as the 127.2% extension may have some short term utility.

WTI Crude Oil Monthly Chart

Chart prepared by James Stanley; CL1 on Tradingview

Oil: from geopolitical worries to concerns about the recession

The crude is an interesting macro vehicle because it connects much of the world. And that was on full display in early 2022 as Russia advanced on Ukraine. Fear of supply constraints was strong and this helped prices reach that new 13-year high on March 7.e. An aggressive and somewhat violent range built afterwith prices now holding support around this 127.2% extension, which syncs with the psychological level of 95.00 and another Fibonacci note level.

A Fibonacci retracement pulled from the December low to the March high produces a 50% marker at 96.47, $2 higher than that 127.2% extension.

More recently, recession fears have started to take over, which may have a negative impact on crude prices, but rather than a supply issue, which emanates from the demand side of the equation. This support zone helped hold the lows, but as recession fears grew stronger, so did the bearish movement in oil prices.

This support zone finally gave way in July. A bounce at the end of the month attempted to reignite the uptrend, but buyers were quickly thwarted as prices fell again, this time setting a new six-month low last Friday.

From the daily chart below, there is another observation – and that is how aggressively the bears have reached prices at or near resistance while they have been rather tepid with price near lows or support. This creates a formation of drooping corners.

WTI Crude Oil Daily Price Chart

WTI Crude Oil Daily Chart

Chart prepared by James Stanley; CL1 on Tradingview

Short term WTI

Going down to the four-hour chart illustrates the stall after this new low was set last Friday. The bulls haven’t exactly taken control of the situation, but that leaves the door open for a potential pullback. And that area of ​​prior support, 94.47-96.47, becomes a viable area to look for lower to high resistance. This may keep bearish strategies as an applicable way forward for now.

But – if this zone is crossed, with the decline trend line sitting overhead, then there is a breakout of the descending wedge formation, which begins to open the door for bullish reversal themes.

WTI Crude Oil Four-Hour Chart

WTI Crude Oil Four-Hour Chart

Chart prepared by James Stanley; CL1 on Tradingview

— Written by James Stanley, Senior Strategist, DailyFX.com and Head of DailyFX Training

Contact and follow James on Twitter: @JStanleyFX

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