Actionable insights straight to your inbox

Crude Oil: Technical Analysis II

Being able to spot trends and understand the vocabulary is essential to understanding price movement in energy futures markets.

Energy Economist

Crudefunders is the first crowdfunding portal to offer direct investment in Oil & Gas Projects for both sophisticated and beginner investors. It is an innovative, technology marketplace that provides a unique opportunity for ALL types and levels of investors to directly participate various phases of Oil & Gas Projects for as little as $1,000 per investment including an exclusive “free look downhole” for our Reg CF investors. Crudefunders also helps create jobs and increase American energy independence, while improving the odds of success for SMB operators and service companies.
Crudefunders is the first crowdfunding portal to offer direct investment in Oil & Gas Projects for both sophisticated and beginner investors. It is an innovative, technology marketplace that provides a unique opportunity for ALL types and levels of investors to directly participate various phases of Oil & Gas Projects for as little as $1,000 per investment including an exclusive “free look downhole” for our Reg CF investors. Crudefunders also helps create jobs and increase American energy independence, while improving the odds of success for SMB operators and service companies.

After last week’s short tutorial on Technical Analysis, it’s time to apply that info to the markets as they stand today. Being able to spot trends and understand the vocabulary is essential to understanding price movement in our energy futures markets. So, we’ll begin today’s article with a couple more terms. This week, we’ll focus on Trend Analysis, Stochastic Analysis, Moving Averages and Relative Strength Index (RSI).

For reference, let’s start by looking at a morning technical analysis on West Texas Intermediate (WTI) crude oil from a couple of days ago by INO.com’s Morning Markets Report. (A copy of the newsletter can be found here.)

June crude oil closed higher on Monday as it extends this month’s rally. The mid-range close sets the stage for a steady to higher opening when Tuesday’s night session begins. Stochastics and the RSI are overbought but remain neutral to bullish signaling that sideways to higher prices are possible near-term. If June extends this month’s rally, the 75% retracement level of the April-May-decline crossing at 51.57 is the next upside target. Closes below the 20-day moving average crossing at 48.29 would temper the near-term friendly outlook. First resistance is the 75% retracement level of the April-May-decline crossing at 51.57. Second resistance is the 87% retracement level of the April-May-decline crossing at 52.84. First support is the 20-day moving average crossing at 48.29. Second support is May’s low crossing at 43.76.”

Here is the chart that correlates to this day’s technical analysis: (Courtesy of INO.com)

Trend Analysis

There are lots of terms here and if you’re not used to reading these types of reports, this technical jargon will confuse. However, there is a wealth of information here and what it tells us helps to protect capital and build profits. The first term we’ll define is Trend Analysis. This type of analysis is defined as attempts to predict future price movement in the futures or equity markets based on prior price movements. Trend analysis has three main time-related trends that they define: they are short, intermediate (or mid-range), and long-term trends.

Relative to the technical analysis above, this report is telling us there is short and mid-term support for prices to move higher in this contract for WTI. This was helpful for the technical traders using this chart as they can see the price for the June WTI is on an upward trend.

Stochastics

The next term that we need to define is Stochastics. This type of technical tool is defined as a momentum indicator that shows the value of a closing price relative to its daily high and low range over a set number of periods. Normally, that period is measured in 14-day periods, but can be measured in months or even years. It helps technical traders understand the tempo or speed of the change in prices. In other words, when prices move more rapidly in one direction, relative to their high and lows for the day, during the 14-day period, often times this indicates that a major movement is afoot. You see, Stochastics is not a measure of price movements; it is a measure of the velocity of the price change and is a very trusted indicator when establishing a trend.

In the article above, it states,

Stochastics and the RSI are overbought but remain neutral to bullish signaling that sideways to higher prices are possible near-term. If June extends this month’s rally, the 75% retracement level of the April-May-decline crossing at 51.57 is the next upside target. Closes below the 20-day moving average crossing at 48.29 would temper the near-term friendly outlook.”

Stochastics are suggesting that the June WTI market is overbought, but strength from other influences is keeping the market neutral to bullish.

Relative Strength Index

Another term that needs to be defined, relative to the report above, is Relative Strength Index, or RSI as it is known. RSI is a measure of the speed and change of price movements. RSI oscillates between zero and 100. A score over 70 indicates an overbought condition and a score under 30 indicates an oversold condition in the market. RSI is probably the most widely used technical indicator. It is featured daily in articles and in most books on technical analysis.

The article above refers to an overbought condition in the market, but does not show its score, so we find that, as in most publications, score isn’t often discussed, just the results of the analysis are used to establish a trend. The best way to understand RSI is to think of it in terms of a tea kettle. When the kettle gets hot, it generates steam to move a market; the hotter the steam the more the price moves. When the kettle cools off it slows the amount of steam it generates and will correspondingly cool the market.

Moving Averages

The next term we’ll define is Moving Averages and it is probably the easiest to understand of all the measurements we use. What moving averages do is to smooth out price fluctuations. Over time, prices in a volatile market will look like an EKG from someone who is having a heart attack. If we look at series of numbers, add a next number and divide by 2, you are creating a moving 2-day moving average. Analysts often use 20, 30, 50 and greater moving averages to smooth out a chart. For our evaluation below, we’ll use a 20-day moving average.

Below is the July WTI chart showing the change in prices on a daily basis for the last year in blue and it shows a 20-day moving average in black.

What you are seeing is the maximum volatility in prices over the last 151 days of the July contract and it shows a much more refined 20-day average price, plotted against the daily chart. Added to the Stochastic and RSI indicators, it appears the market is now somewhat overbought relative to the 20-day moving average, and prices were somewhat higher than the average as well. FYI, WTI did rise back to above $51 per barrel before it turned on the news that OPEC was only going to extend their production cuts, not extend them. When we look at the article above, we quote, “Closes below the 20-day moving average crossing at 48.29 would temper the near-term friendly outlook.”

While we have breached this level, we were not able to close below it, so the technical signals are holding for now.

What we are seeing here is that technical signals given by trend analysis, through Stochastics, RSI and Moving Averages only give an indication as they relate to past performance in a commodity market. Fundamentals, as discussed in previous articles, do change market directions much more profoundly, but the Technicals will help understand direction after the effects of the fundamentals ease. We also understand that in the absence of a fundamental news tidbit, the markets will follow technical channels.

This is why any savvy trader uses all tools available to them, including both technical and fundamental analysis when planning a trade.

By Tim Snyder

Read More from Crudefunders


If you want more information on the energy markets and what is making prices move every day, go to our website www.crudefunders.com and scroll down to where it says “Subscribe”. There you will find our link to the daily commentary “Energy Wise”, a comprehensive piece that includes both fundamental and technical analysis of the day’s energy markets and provides you with the detail that you need. For more on Energy Economist Tim Snyder and his company, go to www.matadoreconomics.com.