WTI: Could we see a 20 handle this week?

<p>It’s been a rollercoaster ride of a day for markets, starting with gut-wrenching volatility in today’s particularly low-liquidity Asian session. While US stocks see-sawed their […]</p>

It’s been a rollercoaster ride of a day for markets, starting with gut-wrenching volatility in today’s particularly low-liquidity Asian session. While US stocks see-sawed their way to modest gains today, breaking last week’s series of losses, the one constant in today’s trade was weakness in oil prices.

West Texas Intermediate (WTI) crude oil shed nearly two points from Friday’s close and while a $2 move would be barely notable with oil trading above $100, today’s move represents over a 5% drop for the commodity. As you’ve no doubt grown sick of reading, oil hit its lowest level in a decade, briefly peeking below the 31.00 handle before barely regaining that level in time for today’s close. The proximate cause for today’s selling, beyond the ongoing turmoil in China, was Morgan Stanley’s conclusion that “$20-25 oil price scenarios are possible” as a result of the dollar’s strength. Whether the proclamations of the world’s always-late-to-the-party megabanks can be taken as gospel truth is up for debate, but it’s clear that traders are latching on to any excuse to sell so-called “black gold”

…So where could the selling stop?

With all the crosswinds of market sentiment, intermarket correlations, and short-/long-term fundamentals at play, technical analysis may provide the cleanest outlook for oil. As we go to press, oil is approaching the bottom of its 3-month bearish channel, confirming that sellers remain in control over the medium-term horizon. The fact that the MACD indicator is once again trending lower below its signal line and the “0” level confirms this bearish outlook.

That said, there is a key support level upcoming where bulls may try to make a stand. Just below the psychologically-significant 30.00 level that many analysts are watching, the 161.8% Fibonacci extensions of the last two notable bounces (March-May and August-October) converge in the 29.30-29.60 zone. With the RSI indicator already deeply oversold, a bounce from this support area later this week would not be surprising. However, even if we do see a sizable bounce in WTI, the medium-term outlook will still favor the sellers as long as oil holds below the top of its bearish channel near 35.00.

WTIDAILY1-11-2016 4-09-04 PM

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.