WTI Crude Bounces off Key Support But Death-Cross Still a Risk

WTI CRUDE OIL PRICE OUTLOOK:

• Oil prices have plunged dramatically in recent months on growing recession fears
• The recent development of a death-cross on the daily chart signals more weakness for WTI crude
• Traders should carefully watch cluster support near $82.00 in possible guidance

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Oil prices, as measured by WTI Light Crude futures, have plummeted in recent months, falling more than 30% from their June highs, with the new leg lower developing since late August. From a fundamental standpoint, there have been several drivers, but the main one is probably the growing fear that the global economy could soon slip into recession amid rising interest rates and runaway inflation, a scenario that could dampen demand for growth-linked commodities.

Convenient and strategically leaked headlines about a potential deal with Iran to reinstate the 2015 nuclear agreement, further lockdowns in China in response to intermittent COVID-19 outbreaks, and continued SPR releases by the White House have all contributed to the downward correction. From a technical perspective, thin liquidity and the invalidation of key support levels have likely amplified downside moves, reinforcing the negative bias.

Although global crude supplies remain tight, sometimes financial markets can set the trading tone for a while, ignoring signals from the physical market (fear and speculation can have a larger impact). With dour sentiment becoming more pervasive on Wall Street, oil may struggle to mount a meaningful recovery in the near term; in fact, prices may drop a bit more before they begin to stabilize.

One bearish sign to keep an eye on in chartist developments is the recent formation of a death-cross on the daily chart, which occurs when the 50-day simple moving average pierces the 200-day simple moving average from top to bottom. This ominous technical event occurred earlier this week, so traders should remain alert for guidance.

Looking at the chart below, we can see that on Wednesday WTI fell to cluster support near the $82.00 handle, an area where a two-year rising trendline and the 50% Fibonacci retracement of the November 2020/March 2022 rally converge. While prices have attempted to bounce off these levels on Thursday with a 1.6% gain, traders should remain laser focused on this pivotal floor: the line in the sand so to speak.

Should sellers push oil prices decisively below the $82.00 zone, downside momentum could strengthen, paving the way for a slide towards $78.00. On further weakness, the focus shifts lower to $70.70, the 61.8% Fib retracement of the move discussed above. On the other hand, if the rebound were to gather force, the first material resistance to consider appears at $85.00. After that, the $90.00 region could act as the next barrier holding bulls.

WTI CRUDE OIL DAILY CHART

WTI Oil Chart Prepared Using TradingView

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—Written by Diego Colman, Market Strategist for DailyFX