Recent headlines should be delivering a boost to oil prices.
Tensions in the Middle East…
A pause in OPEC supply hikes, limiting the amount of oil coming to the market…
Attacks on oil tankers in the Red Sea…
But oil prices keep sliding, and nothing seems to awaken oil from its slump.
The price for a barrel of oil has fallen 25% over the last year.
Yet chart developments point to growing chances for a rebound.
So today, let’s unpack the recent action in oil prices and the key levels that can support a rebound in prices…
Key Price Support
Geopolitical catalysts should be boosting oil. But oil prices are having a hard time gaining traction.
Following Russia’s invasion of Ukraine in 2022, oil prices jumped to the $123 level. That was the highest level since 2008.
But since then, oil has fallen as much as 46%. And since the middle of 2023, oil prices have been trading in a volatile sideways range.
Then a bearish pattern sent prices lower recently.
The chart below shows a “symmetrical triangle” with the dashed trendlines:
The breakout direction from this pattern is often predictable. It typically resumes the price trend we saw heading into the pattern.
In this case, the overall trend was lower after the 2022 peak.
And a breakdown is exactly what happened (see “1”).
But that breakdown has brought oil prices back to a critical support level. Now momentum indicators look extremely stretched to the downside.
And these converging chart developments could drive a rebound in oil prices…
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Favoring a Rebound
Take a look at the chart below:
A key support zone exists in the $65 to $70 area (the shaded box).
As you can see, oil has rebounded from this level on numerous occasions going back to 2021.
Now prices are testing this support zone again.
At the same time, momentum is being stretched far to the downside.
The Relative Strength Index (RSI) is near an oversold level at 30 (see “A”). Nearly every time the RSI has been this low over the past two years, oil prices have seen a short-term rally.
Also look at the 50-day moving average (MA, blue line). Oil prices are 14% below the 50-day MA.
Over the past three years, oil has rarely traded that far below the 50-day MA. That’s another sign to watch for mean reversion to the upside.
Of course, there’s no guarantee that oil prices will find their footing.
But catalysts are lining up for a rebound in oil prices…
And that means there could be solid trading opportunities in stocks like the United States Oil Fund (USO) that track oil’s price moves…
Regards,
Larry Benedict
Editor, Trading With Larry Benedict