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WTI Crude Oil Technical Forecast: Falling Wedge but Can Bulls Force a Reversal?

WTI Crude Oil Talking Points:

  • Oil prices finished last week by setting a fresh six-month-low, testing below the $87.50 level.
  • After a bounce on Monday sellers came back in this morning to temper the move. The big question now is whether bulls can press through a major zone of prior support-turned-resistance sitting overhead.
  • The analysis contained in article relies on price action and chart formations. To learn more about price action or chart patterns, check out our DailyFX Education section.

Oil prices have taken on some added importance in 2022. The year started with fear as the Russian invasion of Ukraine helped to create a spike in February, all the way up to the 130 handle for WTI. This was less than two years after the negative price debacle, when in April of 2020 front-month WTI tripped below the zero level and drove all the way to -40.32. By March of 2022, Oil prices had more than recovered and pushed all the way up to a fresh 13-year high.

As a technical analyst, the negative pricing scenario is something that still gives me a headache. Those prices traded, so it’s valid. But, it was a supply-related issue and not necessarily indicative of crude pricing at the time, as next month futures contracts set a low at 17.27 (ticker: CL2). And it’s not like there was any considerable price action trends below the zero mark, as that was a one-day affair that was largely relegated to a plummeting in price around contract expiration. It ended up merely as an extended wick on weekly charts. For a while, I just relied on that CL2 chart as it felt more valid. But, if I’m analyzing CL1, using CL2 isn’t an adequate stand-in, particularly for matters of shorter-term interest.

I bring all of this up to highlight how longer-term crude studies can remain in flux given that negative pricing in April of 2020. So, I’ll start with a longer-term chart and then work my way down into shorter-term studies that are less reliant on data going back to that April 2020 ‘incident.’

From the monthly chart below, there are two notable take-aways. The first Is the support zone from October of 2011 into May of 2013. This was a zone that held through some pretty considerable grind before oil prices broke-lower in Q4 of 2014. The bottom of that zone even came back in as resistance in October of 2018, after which a bearish engulf printed before a fall to fresh yearly lows. And the second is the March 2022 high, which came just 64 cents from the 161.8% Fibonacci projection of that negative pricing move. This is pertinent as the 127.2% extension may have some use near-term.

WTI Crude Oil Monthly Chart

WTI Crude Oil Monthly Chart

Chart prepared by James Stanley; CL1 on Tradingview

Oil: From Geopolitical Worries to Recession Concerns

Crude is an interesting macro vehicle since it ties so much of the world together. And that was on full display in early-2022 as Russia advanced on Ukraine. The fear of supply constraints ran high and that helped prices to push up to that fresh 13-year-high on March 7th. An aggressive and somewhat violent range built thereafter, with prices holding support around that 127.2% extension, which syncs with the 95.00 psychological level and another Fibonacci level of note.

A Fibonacci retracement drawn from the December low up to the March high produces a 50% marker right at 96.47, or $2 higher than that 127.2% extension.

More recently, recessionary concerns have started to take-over, which can negatively impact crude prices but rather than a supply-issue, that emanates from the demand side of the equation. That support zone helped to hold the lows but as recession fears grew louder and louder, so did the bearish move in oil prices.

That support zone eventually gave way in July. A late-month bounce attempted to re-fire the bullish trend, but buyers were quickly thwarted as prices again broke down, this time setting a fresh six-month-low last Friday.

From the daily chart below, there’s another observation – and that’s how aggressively bears have hit prices at highs or near resistance while they’ve been rather tepid with price near lows or at support. That creates a falling wedge formation.

WTI Crude Oil Daily Price Chart

WTI Crude Oil Daily Chart

Chart prepared by James Stanley; CL1 on Tradingview

WTI Shorter-Term

Going down to the four-hour chart illustrates stall after that fresh low was set last Friday. Bulls haven’t exactly taken control of the situation, but this does keep the door open for pullback potential. And that zone of prior support, from 94.47 up to 96.47, becomes a viable area to look for lower-high resistance. That can keep bearish strategies as an applicable way to move forward for now.

But – if that zone is broken through, along with the bearish trendline sitting overhead, then there’s a break of the falling wedge formation, which begins to open the door to bullish reversal themes.

WTI Crude Oil Four-Hour Chart

WTI Crude Oil four hour chart

Chart prepared by James Stanley; CL1 on Tradingview

— Written by James Stanley, Senior Strategist, DailyFX.com & Head of DailyFX Education

Contact and follow James on Twitter: @JStanleyFX