Beware crude oil prices signalling correction coming

Rising DXY could signal WTI, Brent correction, false break

In my opinion, crude oil prices are determined in the short term by inventory news (sentiment) but in the long run, they are inversely correlated to the DXY i.e. the stronger the USD, the cheaper the price of crude oil but the weaker the USD, the more expensive crude becomes. If you accept this as fact, then it is time for concern for crude oil (WTI, Brent) bulls.

Weekly chart of USOIL (WTI) against DXY below | Source: Tradingview.com

Weekly chart of USOIL (WTI) against DXY below | Source: Tradingview.com

 

DXY is rising.  DXY has risen steeply in the last 4 weeks and now visual evidence favours a rising equidistant channel. DXY is approaching the technical resistance of 100 which was printed last year in 2015. This 100 level has a number of significance:

  1. 100 is a round number, psychological level.
  2. 100 was ‘peak expectation’ for the first Federal Reserve rate hike last year. When the FOMC did not hike, EURUSD spiked 400 pips in 3 hours.
  3. When the FOMC eventually hiked interest rates for the first time in December last year, DXY was approaching 100.
DXY weekly chart from Nov 2014 - present

DXY weekly chart from Nov 2014 – present

As DXY approaches 100 again, USD is strengthening. It also raises the expectation that the Federal Reserve might hike rates either in November and/or December. Expectation of a rate hike leads to more USD strengthening in a self-fulfilling cycle. Hell there might even be a chance that DXY could go beyond 100, that the Fed might really hike and more than once – even if it doesn’t seem likely. All these however means there is a possibility for crude oil to correct as long as our observation in the first chart is correct i.e. USD strengthens, crude oil weakens.

 

If there is a prospect that crude oil prices could weaken, then the chart of USOIL (WTI) definitely appears to support this observation. Note the features:

  • Price ran into a long resistance at the 50+ region.
  • This resistance was there since 13 months, very significant.
  • For 2 weeks price did not close above the green line.
  • Price falls, prints big bearish engulfing that reverses the gains of the previous two weeks.
USOIL (WTI) weekly chart May 2015 - present

USOIL (WTI) weekly chart May 2015 – present

 

On the Brent side, prices look a little worst as Brent is now near to 4-weeks low. Traders need to be doubly vigilant that gains over the last two weeks might be wash n rinse move rather than true gains.

Brent weekly chart

Brent weekly chart

 

What kind of signal to determine if crude oil is really a wash n rinse?

To be sure, it is very difficult to separate true price breaks from false ones. However I have personally observed that most bearish reversals start with a false break. It is a move that herds bulls into a trap and trips the stop loss levels of early bears.  This is one method out of many that I use for myself now that we are heading into the end of October. It is not the most reliable one but is used as an early detection of market sentiment.

USOIL (WTI) monthly chart

USOIL (WTI) monthly chart

This chart is a monthly chart which I use to look into how the whole month performs by the way it closes.

Notice that the two circles show the best monthly closes in the past 15 months. In my opinion, a truly bullish month should be closing above not below. Failing to close above is a signal of sentiment. By using the closing, it gives a slightly earlier signal than if we were to use the extreme ends. Based on these levels, an October close below 48.85 would be a strong indication that the 15-month resistance zone in this chart is as significant as ever. Coincidentally or not, an October close below 48.85 would paint the candlestick red and turn it into a gravestone doji or shooting star.

By next Monday, should have some outcome.

 

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Soh Tiong Hum is Director of TerraSeeds Market Technician Pte Ltd. TerraSeeds is a trading educator in Singapore since 2005.   Soh's Twitter account @sohtionghum was ranked #23 out of The Top 70 Twitter Accounts To Follow In 2015 by MahiFX.   Disclaimer notice: "I do not have a financial advisor's license. I am not qualified by any regulator to give financial advice. I do not know you the reader. Your investment means and motive may be different from me. My posts here are based on observations and meant for education. I am not responsible for for any consequence from your actions."
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