We will study the expected movements for crude oil futures from a simple classical point of view, taking into consideration the monthly expiry of futures contracts. Our technical analysis is based on crude oil futures for January 2011 settlement.
The weekly chart shows the aggressive descend that occurred after recording the historical high around 147.85 towards the bottom of 35.12 zones, from where crude started its bullish correction.
Inside this correctional wave, oil succeeded in passing over 23.6% Fibonacci retracement and built a solid technical base on this level. This base assisted crude to breach 38.2% Fibonacci level at $ 78.00 per barrel, where it hovered for about one year.
Now, oil is approaching 50% for this decline at 91.35, which is the awaited target. Actually, assessing the chart above, we can see that within its bullish journey oil succeeded in breaching a very important resistance level over medium term basis at 87.00 zones.
This level represents a neckline for a bullish pattern, and the breakthrough was confirmed with a weekly closing, signaling further bullishness towards 120.00 areas.
Nevertheless, we have critical resistance areas ahead that could hinder the current bullishness, since it might force crude to move downwards to relief momentum indicators. Theses levels start from 104.55 -61.8% Fibonacci level- and after that 112.00 -the resistance for the bullish channel- that might force oil to correct downwards till 90.00 before resuming the bullish wave.
Stochastic provided a positive crossover supporting this outlook, alongside the SMA 50 which supports crude from below. Nevertheless, we should take into consideration those two technical factors to preserve the positive scenario:
1. The monthly closing should be stable above 87.00 areas to keep the short term bullish outlook intact.
2. The monthly closing should be stable above 78.00 areas to keep the medium term bullish outlook intact.
On the other hand, I found out that I should mention another point of view regarding the crude oil expected moves, this view show the possibility that crude will move downwards from areas around current levels to attack the critical levels over medium term basis around 78.00. The chart below provides the second technical perspective:
This outlook is based on the contracting between two lines, representing the support and resistance for the aforesaid wave, which is a correctional wave since bottoming at 35.12.
Thereby, the resistance of this rising wedge gained further strength due to facing 50% Fibonacci level and that might force crude to move to the downside to attack 78.00 zones.
This outlook is supported by the bearishness on Stochastic since we are facing the psychological levels of $90.00 per barrel and if crude moved downwards, it will initiate a bearish move over short and medium term basis.
Technical note: We should watch out the price behavior very carefully 90.00 resistance and 78.00 support areas.
By: Yasir Mubarak
Senior Technical Analyst