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Oil prices are frequently subject to manipulation.
Oil-producing nations often depend on oil revenue to fund government spending. So they like to see high prices.
For instance, the Organization of the Petroleum Exporting Countries (OPEC) cartel controls the oil supply coming to the market. OPEC also tries to keep oil prices elevated.
But oil-consuming nations like to keep a lid on prices so citizens don’t feel the pinch of high energy prices.
All of this manipulation can make it more difficult to get a clear picture of which way oil prices will fluctuate.
But as traders, we can use chart analysis to forecast the next move.
That’s because the tug of war between supply and demand creates repeating patterns.
So today, let’s check in on oil prices – and one developing chart pattern that may pinpoint the next move…
Tracking Oil’s Price Swings
Geopolitics plays a big role in oil’s price swings.
Oil prices spiked in mid-2022 following Russia’s invasion of Ukraine. Nations allied with the United States punished Russia by refusing to buy its energy products.
As a result, oil prices surged toward $123 per barrel in March 2022 (the arrow in the chart below):
But those high prices raised fears about the impact on consumers. So President Biden released 180 million barrels of oil from the nation’s Strategic Petroleum Reserve. That’s the country’s emergency stockpile.
That caused oil prices to plunge 46% to $66 per barrel over the next year.
Oil prices eventually found a floor around $66 per barrel. They’ve bounced off that level on many occasions, as you can see in the chart.
But in doing so, oil prices are creating a bearish pattern.
If oil prices are about to plunge lower, then you need to watch one key level.
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A Bearish Pattern
Oil’s latest manipulation may come at the hands of President-elect Trump.
He has pledged to massively increase domestic oil production. That could be the catalyst that completes oil’s bearish chart setup.
Take another look at the chart:
Since September 2023, oil has been creating a pattern called a “descending triangle.”
That’s marked by lower highs during each rally attempt, along with a common support level tested on each pullback.
The downtrend line shows the rallies growing smaller. And support around the $66 level keeps being tested.
The pattern is often bearish. A break of support below $66 would complete the setup.
There’s something else to notice since July. When oil rallies from $66, the rally crumbles as it reaches the downward trendline. That’s also when the Relative Strength Index (RSI) reaches the 65 level. You can see that in the red-shaded box.
The RSI measures underlying price momentum. During the last two rally attempts, the 65 level has served as an overbought zone.
Critically, the RSI has already hit that red box during this most recent bounce off the $66 level.
So that gives us a couple of key levels to monitor.
If the rally continues and pushes the oil price above the dashed trendline, then the bulls are gaining the upper hand. That would invalidate the current bearish setup.
But if the descending triangle is still in play, then oil prices shouldn’t be able to rise above the $77 level. The main signal after that would occur if prices fall below $66. If that happens, oil could see a big breakdown.
So keep a close eye on oil in the coming weeks… Savvy traders won’t want to miss their chance to strike if this scenario plays out.
Happy Trading,
Larry Benedict
Editor, Trading With Larry Benedict