Initial price target for oil met today - will its coincidental flirtation with 200-day average join with other bearish factors to send it lower?

Oil met our symmetry target today - hurray! So ... now what?! Let's take a look at the charts and make a few observations for and against oil continuing higher. Fundamentally of course, there are many concerns ranging from whether the economic pickup will last, to inventory and geopolitical concerns. Technically, our target was based on a symmetry level that implies an ABC count, which is often corrective and cautions that this may have been simply a pullback upward that sees price roll over and down again. The target was also based on Fibonacci levels, the first of which was reached in WTIC today simultaneously with the symmetry target. This is another reason oil may weaken now. There are ways that can happen without going to new lows, which I'll describe below. The pattern can become more bullish by turning into an impulse that just continues past the levels reached today. If not, then traders and investors should watch closely to see if oil corrects or consolidates as its next move. I'm not convinced on an Elliott Wave basis that oil finished all 5 waves that should be in a C wave up. It's possible for a small pattern to complete the last 5th wave without shooting much higher; in fact, that could happen with oil just rising slightly above our projected targets (the levels about $65 in WTIC and $35.70 in USO, touched today). The big question then becomes, will it print out a reversal pattern over the next several days?

When you look at the daily and longer-term charts of WTIC and USO that I've included below, you'll see why I find both positive and negative factors in them. As it's almost doubled off its lows (which would be a Fibonacci number of its own), WTIC also reached one of my Fibonacci retracement levels which can be a reversal zone, or at least a place for consolidation. Indicators are mixed, and in particular on the monthly chart, WTIC has achieved the kissback to the broken uptrend channel that I pointed out and discussed weeks ago. Having completed that kissback can be scary - meaning, rolling over after that kissback can point to lower levels - look out for that last step!

But I mentioned that oil could roll over and down without going to new lows. One way would be that the completed movement up so far may count as a larger (A) wave, then after another correction or consolidation in (B), it could go up again to higher levels in wave (C). Another would be that the ABC counts as a zigzag of a larger triangle. Normally triangles are consolidation patterns; there's also a bullish scenario that would be a diagonal triangle moving oil to new highs. I don't hold out hope for new highs, so if oil doesn't roll over to new lows, I'd be more inclined toward the first scenario of a larger (A)(B)(C). One of the reasons why is that, after a corrective or consolidation (B), another rally (C) wave up could get oil to its 38.2% retrace (at $78.21) back to its all-time highs, or the 50% retrace (at $91.51) back to those highs. That type of scenario would be more consistent with what the Point & Figure (P&F) charts below are showing (I've included those for WTIC and USO). (Note however, that if oil instead prints a bearish reversal pattern, that will reflect in the P&F charts which will alter the suggested price projections.)

If oil continues up, either impulsively from here or after a correction/consolidation, that will be very interesting on the monthly chart, especially if it results in re-entering that uptrend channel previously broken. Re-entering that channel could indeed set the stage for a diagonal triangle that, over time, would lead to new highs. Frankly - I'm not seeing it. I'm more inclined to think that either oil does roll over and plumb new depths; or, after a correction/consolidation, it finds its way to one of the higher Fibonacci retracements I mentioned above, by once again touching up to that monthly channel line.

Notice too that WTIC is working with its declining 200-day moving average, and USO is well below its 200-day moving average. Actually today's movement in WTIC was above that key level, but especially given that this was needed to reach the symmetry and Fibonacci level I've been expecting for rather a while now, I don't think it's guaranteed that WTIC remains above it. There are similar tests of the 200-day moving average by the oil service holders ETF (OIH) and XLE (both charts, at bottom below), both of which look like they're in consolidation patterns similar to triangles. I grant that these can turn bullish and break above the 200-day moving average. But be aware, it's also very possible that they will not be able to break above the resistance of that key moving average. It can result in that pattern becoming a "triangle trap" reversal pattern that sends prices back down again.

The weekly chart of USO shows that the 50-week moving average (MA) crossed under the 200-week MA recently, and the weekly chart of WTIC (not included below) shows a similar bearish cross just occurred. Now, one of the bullish factors is that there was a lot of volume at the lows early this year, and StochRSI on the daily chart is strong again. But volume has fallen significantly during the rally, and there are other hints in the technical indicators that bears can argue show impending weakness too. This includes some bearish divergence in StochRSI at least starting in the OIH and XLE charts which hints at the possibility that those triangles may become traps.

The monthly chart showing the kissback to the broken channel line is the one that looks the most bearish to me. Then, one factor I think argues most strongly in favor of a continued move up is the fact that a continued rally "should" reach toward a higher Fibonacci retracement. But I really don't know that oil "has" to do that. One aspect that I did not incorporate into this is cycles timing, and that might help oil as well. But just looking at the obvious timing of the rally waves since the end of 2008, it's possible that oil may be in a cycle crest.

Furthermore, if my other analysis about the dollar probably getting support at its current levels is correct, the dollar may actually strengthen. If that happens, it would likely be bearish for oil. Conversely, if the dollar loses support that would tend in oil's favor.

All in all - where I'm personally tilting, is to take a skeptical view on oil from here. This is based partly on the views of oil I've made over a number of weeks (you can look at my prior posts under the "Oil" label to see those over time), and partly on how this rally leg has expressed to date. Therefore I'm considering to start getting on the defensive side now with oil, if it triggers to the downside (such as a day that moves or closes under the low of prior day). USO's hourly chart (at right) does show some selling may have started this afternoon. Then I'll be on right side of the game if it continues by pulling back, correcting or consolidating - or more bearishly, gets untidy and goes to new lows. Conversely if oil then finds support and starts back up again, I can switch back once again to a more bullish view.


(click on any of the charts to see it larger or more clearly)