Tech Musings:- Crude Oil

Crude oil has completely crashed in last three months. WTI crude made a high of 107 USD and had fallen to 66.15 as per Fridays close. Brent crude had fallen from a high of 115.66 in June 2014 to a low of 70.15 as per yesterday’s close.

My call on crude would were mixed for the Year. The first scenario I envisaged at the beginning of the year was the one which has fructified in the market. On 10^th January 2014, I wrote the following, “I have been maintaining a bearish view on crude oil since last year.  In my last update on Crude oil on 16^th November 2013 I wrote, ‘Crude oil moved up to 115 levels and has crashed to 93 from there. I still believe that crude oil will close the year below 100 USD level and see a sharp correction in next year. The target for Crude stays at 70 dollar. Crude oil indeed closed the year below 100 levels and has corrected sharply in the first nine days of 2014.

If we look at the given chart of Brent Crude we can see that it is forming a evening star in a yearly chart. The impact of this pattern is going to be profound and I won’t be surprised if Brent crude sees more than 30% correction in current year.  Similarly the second chart is a yearly chart of WTI crude. WTI crude is having a strong support at 87 – 90 levels. Once this level is broken I am expecting WTI to fall upto 70 USD levels in current year.”

In my second post on crude written on 22^nd June 2014, I wrote the following, “I have been continuously bearish on crude oil since last one and half year and my view was completely wrong. In last two years crude oil has largely stayed in a range and refused to correct. In my last post on crude written on 10^th Jan 2014 I called for a 30% correction in price of crude oil.  In that post I wrote, “Similarly the second chart is a yearly chart of WTI crude. WTI crude is having a strong support at 87 – 90 levels. Once this level is broken I am expecting WTI to fall upto 70 USD levels in current year.”

Although the sell call was never triggered the view had proven completely wrong as crude made a bottom of 91.26 and have moved up 15% since then. If we look at the current chart of crude oil we can see that Brent crude has been consolidating between 100 to 116 USD levels. Any break out above 120 will lift the prices to 150 and beyond

Similarly if we look at the chart of WTI Crude it is consolidating between 90 to 112 levels. Any breakout above 115 will move the prices to 150 and beyond. If we look at the long term chart of crude oil we can see that it is trading in a channel. The support for this channel is at 90 USD and the target for the breakout come at 170 – 200 levels. This ensures my view that once crude moves above 120 we will see swift upward movement in prices of crude oil.” 

If I analyze my call with advantage of having hindsight information I think it was the sucker rally in crude which got me in and made my change my view.

For advantage of my reader I will define what sucker rally means. “A temporary rise in a specific stock or the market as a whole. A sucker rally occurs with little fundamental information to back the movement in price. This rally may continue just long enough for the "suckers" to get on board, after which the market or specific stock falls.”

Since the beginning of January 2014 till the first week of April 2014 crude was trading within a narrow range. Crude moved up sharply from 99 USD to 107 USD in next two months. Which brought the made me feel that the resistance of 115 on WTI may be taken out and crude will start multiyear Bull Run hence I changed my call.

Although, in my second post I have continuously mentioned that crude will move up sharply only if it breaks above the resistance of 115 (WTI) and 120 (Brent) which never happened, I can claim that the call was never triggered but the truth is that the sucker rally in Crude oil got me in. 

If we look at the current chart of crude oil we can see that it had broken down from the consolidation pattern exactly as I have been mentioning over last two years. The targets for this pattern have been more or less achieved. Any further fall in crude prices cannot be ruled out but will happen only after some pull back or consolidation.