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Oil Price Analysis: Possible cracks in the downtrend

  • Oil is in a short-term bearish trend, but is showing signs that could be early evidence of a reversal.
  • Oil has formed a bullish Doji candlestick reversal pattern at the day's lows that could portend a stronger recovery.
  • A break above the main trend line would be needed for confirmation – as things stand, the downtrend remains intact.

US West Texas Intermediate (WTI) crude oil rose more than a percentage point to $78.01 on Thursday.

The 4-hour chart (below) shows a short-term downtrend, which according to the old saying “the trend is your friend”, is expected to continue, favoring shorts over longs.

However, WTI oil is showing signs of bullish reversal. He formed a Doji candle at Thursday's lows of $76.74 (shaded rectangle). This was followed by two consecutive bullish candles. Although it is too early to say for sure, the candlestick formation could indicate a short-term trend change.

Oil 4-hour chart

If oil continues to rise and finally breaks above the green downtrend line around $79.00, it would be a sign that the short-term trend has reversed.

A definitive break above the trend line should be accompanied by a longer than average green candle that closes near its highs or by three green candles in a row that break above the trend line.

Such a breakout would be expected to rise to a target around $80.00, the resistance level of the May 20 lower high.

The MACD (Moving Average Convergence Divergence) momentum indicator is below the zero line, indicating a bearish environment. However, the blue MACD line appears to be about to cross above its red signal line, which would give a buy signal in line with the possibility of a reversal indicated by the candlestick pattern.

Alternatively, a capitulation and continuation of the bearish trend still intact would cause the WTI oil price to extend lower. A break below the May 15 monthly low at $76.38 would add confirmation to the downtrend and would likely result in a move lower to the support of an older low at around $75.75 initially, with deeper declines attacking the main historical support at 71.50$.

Source: Fx Street

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