Technical Resistance Reached – What’s Next?

Technical Resistance Reached – What’s Next?

Crude Oil Outlook:

  • Crude oil prices have exploded higher in recent days – but charts suggest a ceiling may have been reached.
  • Since December 21, 2021, crude oil prices have stayed above their daily 21-EMA (one-month moving average).
  • According to the IG Client Sentiment Index, crude oil prices retain a bullish bias in the near-term.

Oil Explodes Higher

We’ve previously noted that “the Russia-Ukraine conflict has provoked significant volatility in energy markets, and the net-result may be bullish for crude oil prices.” Furthermore, “American and European sanctions towards Europe will only constrain global energy supplies, with no corresponding downdraft in demand…the global economic backdrop, regardless of what’s transpiring on Europe’s eastern front, remains quite strong, suggesting demand for energy will build in the coming months.”

Needless to say, the combined sanctions by the European Union and the United States towards Russia has added fuel to the proverbial fire that has been the speculative supply-demand imbalance driving energy markets for the past several weeks.

The two-day surge in crude oil prices is the strongest seen since May 2020, when energy markets were climbing out of the COVID-19 pandemic lows. And while the fundamental backdrop has only strengthened, there are technical signs that a critical level of resistance has been reached that may cap further gains in the foreseeable future; similar to the outlook for gold prices, a much more dramatic escalation by Russia is necessary if recent highs are to be breached.

Oil Volatility, Oil Price Correlation Tightens

Crude oil prices have a relationship with volatility like most other asset classes, especially those that have real economic uses – other energy assets, soft and hard metals, for example. Similar to how bonds and stocks don’t like increased volatility – signaling greater uncertainty around cash flows, dividends, coupon payments, etc. – crude oil tends to suffer during periods of higher volatility. However, heightened geopolitical tensions are translating into higher oil volatility, allowing for oil prices to move higher in an atypical manner that will likely persist for the foreseeable future.

OVX (Oil Volatility) Technical Analysis: Daily Price Chart (March 2021 to March 2022) (Chart 1)

Oil volatility (as measured by the Cboe’s gold volatility ETF, OVX, which tracks the 1-month implied volatility of oil as derived from the USO option chain) was trading at 60.20 at the time this report was written. The surge in oil volatility – driven by uncertainty around near-term energy supplies – has coincided with higher oil prices. The 5-day correlation between OVX and crude oil prices is +0.93 while the 20-day correlation is +0.79. One week ago, on February 23, the 5-day correlation was -0.94 and the 20-day correlation was +0.37.

Crude Oil Price Technical Analysis: Daily Chart (November 2020 to March 2022) (Chart 2)

Crude Oil Price Forecast: Technical Resistance Reached – What’s Next?

Crude oil prices are off their daily highs, but are still clocking a positive session on the way to the strongest two-day rally since May 2020. But the area where crude oil prices retreated from represents a confluence of resistance that suggests a near-term top may have been reached near 114.00: the 100% Fibonacci extension of the November 2020 low, October 2021 high, December 2021 low move; and upper trendline resistance in a pitchfork drawn from the November 2020 low. This does not mean that crude oil prices are set to sell-off from this point; rather, we may see a period where the crude oil price rally slows down.

Crude Oil Price Technical Analysis: Weekly Chart (January 2008 to March 2022) (Chart 3)

Crude Oil Price Forecast: Technical Resistance Reached – What’s Next?

If crude oil prices do continue to rally from this point, another big level of resistance is nearby: the May 2011 high established at 114.83. Among the May 2011 high, the pitchfork resistance, and the 100% Fibonacci extension, a formidable confluence of technical resistance suggests a ceiling is nearby.

And yet if this area is breached to the topside, there really isn’t much by way of any more significant technical levels for traders to look to before the all-time high established in 2008. With a bullish momentum backdrop – crude oil prices are above their weekly 4-, 8-, and 13-EMA envelope, weekly MACD trending higher, and weekly Slow Stochastics nestled in overbought territory, ‘buy the dip’ remains the preferred approach.


Crude Oil Price Forecast: Technical Resistance Reached – What’s Next?

Oil – US Crude: Retail trader data shows 33.32% of traders are net-long with the ratio of traders short to long at 2.00 to 1. The number of traders net-long is 7.56% higher than yesterday and 16.76% lower from last week, while the number of traders net-short is 9.27% higher than yesterday and 41.52% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests Oil – US Crude prices may continue to rise.

Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger Oil – US Crude-bullish contrarian trading bias.

— Written by Christopher Vecchio, CFA, Senior Strategist

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By: Christopher Vecchio, CFA

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