So far in August, WTI has shed over 7% after hitting a strong resistance level around $77. How further downside should traders expect?

It’s a popular fact that the world runs on energy thus the black commodity (oil) reflects the global economic growth. Since Covid, we have seen a new face of the oil market. After dropping to levels that were lower than imagined in April 2020, as a result of very low demand following Covid, the entire market has bounced back to match the peak levels of the last three years. However, the market is facing two barriers – Covid and a strong technical resistance zone. The coincidence of the two barriers should tell traders the possibility of a lower oil price in the coming months.

Demand down on delta variant

The delta Covid variant broke out in July with significant counts in India – the world’s 3rd largest Oil consumer. Since the breakout, some parts of Japan and some other major oil-consuming economies have been on lockdown. Japan and India contribute to 8.7% of the world’s oil consumption – sitting at 4th and 3rd consecutively. At the same time, in the last OPEC+ meeting, the Oil cartel decided to add to supply, having seen increased demand and price surge in the last 12 months.  Because of these factors, the two oil benchmarks have shed 8% each since the end of June.

Technical Analysis: WTI hits major resistance zone

As the monthly WTI chart above shows, the oil price rally was rejected at the $74.5-77 resistance zone. The market has a keen memory of this zone – first formed in November 2011 and then acted as resistance in October 2018 and could act similarly this time around albeit with less vigor. The rejection started in June as the monthly chart ended with an inverted long-legged Doji candle formation. Currently, the August monthly candle is bearish – confirming the potential reversal. However, we will have to wait till the end of the month bearing in mind how July ended close to the opening price around $73.5 after dropping close to $65 earlier in the month. If August ends with a significant bearish engulfing formation, how deep could the oil price go?

Technical Analysis: How deep should we prepare?

The chart above shows that the expected monthly engulfing off the major resistance zone is not the only technical evidence pointing toward a bearish oil market. Also, there is a clear price-momentum divergence which is also a good tool to identify reversals, especially off a key zone. More important is the fact that WTI has completed a clear Elliott wave impulse pattern which should be followed by a 3-wave corrective dip. The dip has started but the concern is how deep it would go. If the impulse wave pattern is not getting over-extended, we should see at least a retracement to the 38.2% Fibonacci level at $47.5 which is just above a key support zone.

However, there is a caveat. The first sign of the dip is already completing a corrective structure which could be one of the sub-waves of the impulse wave pattern. On the other hand, looking at the bigger picture, the evolving pattern could be a double or triple zigzag. The caveat shows the dip toward $45 is not 100% certain and traders should throw some caution by reviewing the major events unfolding and the intraday/hourly charts for better decision making. But, with this long-term technical overview, we shouldn’t be surprised if the oil market plummets further in the coming weeks and months.

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