Crude oil: was that just a dead-cat bounce?

Crude oil prices recovered from sharp losses on Thursday, with Brent ending the day higher and WTI flat. Both oil contracts saw some follow-through in buying momentum earlier today. However, at the time of this writing, crude oil prices had given up their earlier gains and were back in the red. The lack of any real follow-through in buying pressure despite what appeared to be a key reversal day is making me wonder whether more losses could be on the way. We should have a better idea depending on where it will close today’s session.

Crude oil prices recovered from sharp losses on Thursday, with Brent ending the day higher and WTI flat. Both oil contracts saw some follow-through in buying momentum earlier today. However, at the time of this writing, crude oil prices had given up their earlier gains and were back in the red. The lack of any real follow-through in buying pressure despite what appeared to be a key reversal day is making me wonder whether more losses could be on the way. We should have a better idea depending on where it will close today’s session.

As can be seen from the chart, WTI bounced strongly yesterday off a bullish trend line and support at $48.25. It also managed to reclaim the 200-day average and posted a bullish-looking doji candle. So from a technical point of view, the chart looks bullish. However, the lack of any significant immediate follow-through in buying momentum means this could be a trap for the bulls and we could potentially see further choppy or lower prices in the short-term.

Of course, this is not the first time WTI has bounced back after briefly dipping below the 200-day average. As highlighted on the chart, this characteristic of WTI has been quite common in recent times. Self-fulling prophecy is what I am thinking has happened here, because this behaviour of WTI around its 200-day average has happened many times and has become so obvious. Thus, yesterday’s recovery could very well turn out to be a dead-cat bounce.

That being said, the bearish bias would only be re-established if WTI were to break and hold below Thursday’s range either today or early next week. Indeed, if WTI were to regain its poise and end today’s session in the black, then that would be technically bullish as it would indicate the bulls are coming back into play. One way or another we will have a better idea about oil’s near-term direction by the end of today’s session, at least from a technical perspective anyway.

Some of the key support and resistance levels to watch are drawn on the chart in blue and red, respectively. In the event that support at $48.25 breaks, WTI’s next stop could be 100 points lower at $47.20, the low from March. Beyond that the Fibonacci convergence area around $45.00 could be the next downside target. Meanwhile if WTI breaks back above $49.40 resistance (the high from Thursday) on a closing basis then this would be bullish. In this potential scenario, WTI may be able to rise towards the next bullish objectives or resistance levels at $49.10, $51.35 and then $53.00.

Source: eSignal and FOREX.com. 

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