Technical Analysis – US oil futures drop back from 50; still positive but will they break out?

Michalis Florentiades, XM Investment Research Desk

Oil has rallied hard since the end of September, leading price to top 50 for the first time in more than three months.  However, it did not have enough strength to break the 51.65 early June high.  Therefore oil stayed in the 40-51 dollar range that has been in place since around mid-April this year.

According to the Ichimoku analysis, oil’s prospects are positive and it should test the 51.65 high soon.  Price is well above the cloud and the Tenkan-sen (red line) is above the Kijun-sen (blue line), which is also positive.  Relative Strength Index (RSI) is at 62, which is another bullish indicator.  Note that RSI has had some success in calling the tops in oil (overbought conditions have coincided with sell-offs), as the indicator works better when price is range-bound.

On the downside, oil could find short-term support at the Tenkan-sen line at 47.50.  Oil is a little vulnerable to a correction because its recent rally from 45 to 50 is looking overextended.

To sum up, the short-term momentum for oil is positive and it should re-test the 51.65 high.  Unless however the price makes a fresh high and convincingly breaks out of the range, traders should be cautious in assuming that the oil market has turned to the upside.