Oil prices are down more than 11% so far this week. The chart holds an important hint for investors.
Oil prices have been under pressure this week as a series of headwinds knocked the commodity lower.
Oil futures are down about 3% on Wednesday and fell more than 8% on Tuesday as oil broke below $100. In all, it’s down almost 11% so far this week.
The major concern right now is a recession. If there’s a global recession — and some may argue we’re in a recession right now — then energy demand is going to take a hit.
Other headwinds include North American production picking up pace and the continued strength of the U.S. dollar.
The dollar recently hit a multidecade high as the Fed continued to tighten its monetary policy. That in turn is creating strength for the dollar and thus weakness in commodities.
For what it’s worth, energy stocks have taken a hit, too.
The Energy Select Sector SPDR ETF (XLE) – Get The Energy Select Sector SPDR Fund Report is down 28% from its highs and has fallen in four of the past five weeks. That said, it’s still the best-performing sector this year and over the past 12 months.
As for oil, let’s see where crude may find its footing.
Trading Oil
Daily chart of oil prices.
Chart courtesy of TradingView.com
Two areas stick out on the chart for oil: the $123 to $124 zone and the $102 to $104 area.
Oil prices simply could not break out over the $123 to $124 area, then failed to hold the 10-day and 21-day moving averages as support, as well as the key $115 area.
By failing to advance beyond $123 to $124, oil cemented its lower high, a bearish technical development that gained steam once short-term support failed to buoy it.
While the $102 to $104 area ultimately held as support, oil first had to break below uptrend support (blue line) to get there. On the ensuing rally, what should have been support a few weeks prior — the $115 area and the 21-day moving average — was resistance this time around.
All this is to say that from a technical perspective, oil prices have been quietly deteriorating for almost a month now.
As it stands, oil is just now getting to a key support area in the mid-$90s. This zone was resistance in February but has been support since March, with each dip to this area sending oil prices higher by at least $20.
I wouldn’t be surprised to see an overshoot of this level, though, particularly as inflation looks to be cooling off, worries about a recession continue to grow and the the U.S. dollar stays strong (it’s hitting new highs again today).
If that’s the case, then the 200-day moving average is in play.
The bottom line is pretty simple: $92 to $95 is a must-hold support zone for oil bulls. If it holds, $100 is the next obvious upside level, followed by the declining 10-day moving average and the $110 area.
