WTI Crude Oil Update: Deep Correction on the Horizon

WTI Crude Oil (USOIL) has been recently making waves. The value of the highly-traded commodity skyrocketed by as much as 78.8% in one year. From the low of 42.08 in June 2017, it climbed to as high as 75.24 in July 2018.

This drove many investors into a euphoric state. However, seasoned traders know that the best time to sell is when participants are euphoric. That is what’s happening in the market right now. In this article, we explain why WTI Crude Oil may be headed to a deep correction.

Bullish Exhaustion

USOIL broke out of an inverse head and shoulders pattern in September 2017 when it took out resistance of 50. The price action attracted breakout players who helped push to pair to as high as 75.24 in less than one year. At this price point, however, it appears that bulls have given all they have.

Daily chart of USOIL

A quick look at the daily chart shows that the bull run has come to an end. USOIL has broken out of a broadening wedge pattern when it went below 68 support on August 8, 2018. The price action is supported by a bearish divergence on the RSI.

Other traders may see these developments as a case for a pullback but not a deep correction. A long-term perspective should clear that doubt.

Converging Resistances

An in-depth analysis of USOIL shows multiple resistances converging at 75. These resistance areas are strong as some trend lines have remained intact for more than 10 years. In fact, one trend line go as far back as 1999! It will take more than a breakout rally to take out 75.

Monthly chart of USOIL

The strength of these resistances is why USOIL is not a case where investors should buy on dips. Even if the commodity rallies, it is very likely that bears will successfully defend the resistance. That would only serve as a confirmation. In this case, the confirmation should trigger a selling frenzy.

Projected Movement

To have a chance at taking out 75, the market needs to correct and consolidate for some time. Using the same support and resistance levels, it seems that USOIL would be locked trading in a falling wedge.

Projection of USOIL

As market participants realize that 75 is the apex of the bull run, many would dump positions to secure gains or cut losses. USOIL may fall back to support of 28, which appears to be the apex of the falling wedge. The increased demand at this price level should catalyze the breakout and spark a rally back to 75.

If the projected scenario occurs, then we have a double bottom structure. This pattern might just be enough for bulls to take out heavy resistance of 75 and send USOIL above 120.

Bottom Line

USOIL may have grown by 78.8% in one year but it seems that it’s the end of the line for this run. Bulls look exhausted. Additionally WTI Crude Oil hit a massive resistance at the 75 price level. Technical analysis show that a deep correction looms before a market can kickstart another bull run.

Featured image courtesy of Shutterstock.

Kiril is a CFA Charterholder and financial professional with 5+ years of experience in financial writing, analysis and product ownership. He has passed all three CFA exams on first attempt and has a bachelor's degree with a specialty in finance. Kiril’s current focus is on cryptocurrencies and funds, as he does his own crypto research and is a Product Manager at Mitre Media. He also has his personal website, InvestorAcademy.org where he teaches people about the basics of investing. His ultimate goal is to help people with limited knowledge of finance and investments to create investment portfolios easily, and in line with their unique circumstances.