Let's get Technical!: August 2020

Wednesday, 12 August 2020

CRUDE OIL: The damp days to return, another price decline on the charts

Hello Reader!

While the world grapples with the aftermath of COVID-19, the business and finance world is struggling to adjust to the new realities as well. With lowered top-line across most of the businesses, the emergence of new sectors, higher digitalization stands to threaten several status quo previously prevalent. over the next year, we will witness many businesses go down the same path producers of chariot whips and boot heels for men did. Evolution is the key to survival for businesses.

But what about the cost? The lowered crude oil price has send many businesses into a frenzy. Government and businesses have openly filled in their crude oil reservoirs with what they perceived as never to return cheap prices. However, what if I told you that the lower prices were returning soon?

A simple technical analysis of the crude oil charts across different time frames has a well-knit story of the downtrend which has been unfolding on the charts of crude oil since the crash in 2007.

Crude Oil stands at $41.8 per barrel. This is historically a very important price zone. On several different occasions in the past, crude oil has taken support at this level as highlighted in the chart below. Now, with the world being a very different place, $41.8 is posing as a strong resistance. This fungible nature of price levels is quite commonly observed across stock indices, individual stocks, currencies, and commodities.

Crude Oil: Monthly Chart- Period shown : 2009 to 2020

Lower-highs, lower-lows have been observed in crude oil post the 2007 crash. The Primary trend has been down with intermittent rallies. Since April 2020, one such minor trend upside rally has been witnessed.

A quick glance at RSI shows how a penetration below the level of 30 has meant more bad news for crude oil. Back in Dec 2014 when RSI broke below the level of 30, prices could only temporarily recover after that. Soon in Jan 2016, crude oil forged a new price low after falling 50% from its recent high of $61 to $27 per barrel.

History can be seen repeating itself. Today, crude oil price stands at the strong resistance zone of $42 PB, with lost momentum and at the edge of a cliff. It is only a matter of time when crude oil prices will fall again and forge a new below $20. We are discussing the possibility of a 50% price slide from the current levels as indicated by RSI.

Crude Oil: Weekly Chart- Period shown: 2009 to 2020

After having looked at the monthly and weekly charts of Crude Oil, the story recited by the Daily chart is no different. It reverberates the eminent message of downfall by means of the Negative Divergence between price and RSI. Negative divergence is an indication of lost price momentum. It is especially potent when it occurs close to an important price resistance (like $42 in this case) after a prolonged rally.

All across the time horizons- monthly, weekly, and daily, the tale of weakening crude oil prices can be heard loud and clear. It is best to be cautious and brace ourselves for what is to follow. The pain of hammered crude oil price is going to resume.