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Will There Be An "Oversold Bounce" After A Big Drop?
Summary:
Oil prices recorded their longest one-week decline of the year last week, falling more than 5% overall for the fourth straight week, and closed below $79 per barrel on Friday for the first time since January, as global central banks let loose to step up their fight against inflation at the expense of economic growth.
CLOSED
79.729
Opening Price
81.500
TP
71.600
SL
83.446 +0.016 +0.01%
1771
Point
Profit
71.600
SL
81.505
Closing Price
79.729
Opening Price
81.500
TP
Fundamentals
Last week, the WTI crude oil near-month contract fell more than 5% overall. Among other things, market concerns about a slowdown in crude oil demand due to increased inflation-fighting efforts by major global central banks at the expense of economic growth overshadowed the escalation of Russian military action in Ukraine.
Oil prices briefly spiked earlier last week when Russian President Vladimir Putin ordered the "partial mobilization" of 300,000 people to Ukraine for Russia's first major military draft since the end of World War II. Putin also hinted at the possibility of using "any means" to defend Russia. The market interpreted this as "an escalation of the war including the use of nuclear weapons".
However, oil prices fell below the $80 mark before the close late last week due to a stronger USD. Fears of a recession have increased as major central banks around the world raise interest rates again to fight inflation. In the last week, the Fed raised its key interest rate for the third consecutive time by 75 basis points. The following day, the Bank of England raised rates by 50 basis points to 2.25%, the highest rate since the financial crisis began in 2008.
In terms of the market, crude oil prices were confined to a relatively narrow range lower for most of last week. Fears of a global recession due to both rising borrowing costs and price pressures dampened crude oil price gains.
At the same time, market fears of a hard landing for the U.S. economy and the global economy are seeping into the financial system. And the use of interest rates as a "hammer to curb rising inflation" has dampened economic activity, which is why there has been a sell-off.
In addition, fears of an economic slowdown have led to what could be the first quarterly decline in crude oil prices in more than two years. A difficult and potentially volatile quarter awaits with multiple conflicts and uncertainties. While growth risks have been factored in, the market remains concerned about the impact of reduced supply from the EU's embargo on crude oil to Russia one day and the sale of 180 million barrels of crude oil by the U.S. from its Strategic Petroleum Reserve.
Nevertheless, inventory data from API and EIA could bring some volatility to crude later this week, as another massive increase could confirm that demand is slowing. On the other hand, a surprising increase in inventories could indicate that rigid demand remains high despite economic uncertainty.
Technical Analysis
WTI crude oil continues to trend lower on the hourly timeframe. The 100-day SMA is below the 200-day SMA, indicating that the path of least resistance is to the downside, or that the sell-off is more likely to resume than to reverse.
However, the stochastic oscillator is oversold and looks poised to pull higher to indicate a return of bullish pressure. The RSI is also in the oversold territory to reflect short-side weakness. If this oversold condition persists, it could be enough to push crude oil prices higher to the 61.8% Fibonacci retracement level at $82.55, which is close to the trend line and former support area. A small correction could meet resistance at the 50% Fibonacci retracement level at $81.50 or the 38.2% Fibonacci retracement level at around $80.50. Either of these resistances could push crude oil prices lower near the swing low of $77 or lower. However, the prices are dominated by an oversold bounce. It is recommended to buy the dips.
Trading Recommendations
Trading Direction: Long
Entry Price: 78.60
Target Price: 81.50
Stop Loss: 76.60
Valid Until: 2022-10-10 20:00:00
Support: 77.19
Resistance: 80.50, 81.50, 82.55
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Master of Economics, 8 years in the financial industry, CFA holder, joined HSBC (Hong Kong) Bank in 2013 after graduating from the University of California, USA in the Investment Research and Markets Department. With years of financial market experience and trading experience, having provided excellent investment advice to many brokerages, entity derivatives importers and clients in Greater China.
Related Analysis
"Downward Impulse Waves" Structure Is About to Come to an End and Reverse?
PENDING"Head and Shoulders Bottom" Pattern Appears to be Taking Shape, but the Adjustment Period is Slightly Insufficient
PENDINGUpward Trend Is Still Intact Even After a Strong Sell-off
TRADINGBuy Low and Sell High with Bearish Outlook Unchanged
PENDINGWill the "Downward Impulse Waves" Structure Usher in the Last Decline?
TRADING
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