Wednesday was an interesting day for global markets, highlighted by a big intraday reversal on Wall Street. After gapping almost 1% higher to start the day, US stocks faded into negative territory as of writing as traders expressed their disappointment with Apple’s big media event. Not surprisingly, the waning buying pressure in equities has spilled over into other markets, with bond yields falling, the US dollar rallying, and oil reversing Tuesday’s gains.
Zooming in on oil, the West Texas Intermediate (WTI) contract is at a critical technical junction. As we go to press, the commodity is pressing against the bottom of a nearly two-week symmetrical triangle pattern at 44.50. This technical pattern is analogous to a person compressing a coiled spring: as the range continues to contract, energy builds up within the spring. When one of the pressure points is eventually removed, the spring will explode in that direction. Currently, the lower bound appears to be in the most trouble, though a bounce is still possible.
As a rule, it’s notoriously difficult to predict the direction of a breakout from a symmetrical triangle pattern in advance, but technical oscillators can often provide a valuable leading/confirming indication of a breakout. In this case, the RSI indicator is carving out its own descending triangle pattern, so traders should keep an eye on that indicator for possible confirmation of a breakdown in WTI itself.
Beyond risk appetite, the most important fundamental factor that could drive oil prices this week will be Thursday’s crude oil inventories report, which is expected to show a 300k barrel build in inventories after last week’s surprisingly large 4.7M barrel buildup. Another sign of excess supply could serve as the nudge to confirm a breakdown in “black gold.”
If we do see a confirmed downside breakout in WTI, bears will likely target the two-week low and 50% Fibonacci retracement at 43.50, potentially followed by the 61.8% retracement at 42.15. On the other hand, a near-term recovery in the price of oil (not our base case at this point) could open up the top of the triangle pattern, and yesterday’s high, at 46.00 next.