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A ‘dead cat bounce’ or is Crude Oil preparing for a corrective rally?

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A ‘dead cat bounce’ or is Crude Oil preparing for a corrective rally?

Crude oil has perhaps garnered the biggest attention in the markets, perhaps only next to the US equity markets. The sharp and quick decline in prices has taken many by surprise with little to no corrections, akin to the Euro or the British Pound’s decline this year. Crude oil prices have been trading well below the intended target of $62.45, the monthly symmetrical triangles price objective. The decline was however even steeper after prices made a low to $53.91. The question that comes to mind is if prices will continue to fall, eventually towards the next major support at $41.60, or if we could see a correction back to the broken support at $78.7 or perhaps even the most recent price level at $62.45.

The monthly charts at the time of writing doesn’t provide much clues into the price action, but the weekly candlesticks, with still a trading day left for the week to close is currently showing signs of indecision after leaving major wicks on either sides. This week’s candlestick is therefore very likely to provide some short term clues into Crude oil prices for the coming weeks. We would however like to remind that the previous week’s candle closed with a sharp bearish Marubozu candlestick pattern with no wicks and strong open and close levels, indicative of a continuation to the bearish trend.

Crude Oil preparing for a corrective rally
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igure 1: Crude Oil Weekly Chart

There haven’t been much of fundamentals in regards to Crude Oil since last week with the passing news of Russia and other non-OPEC countries to keep up at current production levels in order not to lose their market share. The only comment worth bearing in mind has been comments from the OPEC community where recently an Oil minister reportedly commented that they wouldn’t be too concerned even if prices decline to $40 a barrel. From a global perspective, the falling crude oil prices have become a major concern for most central bankers. Although the fall in prices is a boost to the GDP, it does take its toll in terms of putting downward pressure on inflation. With at least some of the Central Banks done with their easy monetary policy, the downward pressure on inflation has been a show stopper in regards to interest rate hikes. A good example has been the UK’s BoE and the more recent Fed’s statement which urged markets to be patient whilst expressing concerns regarding inflation.

Crude Oil preparing for a corrective rally
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igure 2: Crude Oil H4 Chart – Falling Wedge

The above 4-hour chart of Crude Oil shows a break out from the falling wedge. However, the main risk to this technical chart pattern is the lower support line of the price channel which could act as resistance in the event prices look to break higher. Furthermore, the region between 59.7 and 57.15 is likely to come in as a strong resistance level which could cap any upside gains, unless the prices are driven by bullish fundamentals, which is unlikely at this point in time. It could in all probability turn out to be a dead cat bounce as prices could continue to drop lower.

Only a solid confirmation of a retest of 59.7 levels as support could be convincing for a possible move towards $62.45 and perhaps even as high as $78.7.

With investors easing off, heading into the yearend holidays, volumes are expected to decline sharply coupled with low liquidity which could make it a risky bet to try to catch the bottom in Crude Oil. It could perhaps take a week or two into the new year in order for normality in the markets to resume which could provide better clues into the price action in Crude Oil.

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