Chapter 22 08/08 WTI: Go Short at the Highs as the Bulls Still Fail to Shake Off the Range-bound Pressure
Abstract: During the Asian and European sessions on Tuesday, the price of WTI crude oil fell below US$81.00, falling more than 1.00% in the day, and continued to lose its upward momentum after rising for six consecutive weeks.
Fundamentals
The reduction of OPEC+ production led to the tightening of the global market, which failed to effectively boost the crude oil market. WTI crude oil closed down by 1.10% on Monday and continued its downward trend on Tuesday, falling over 1.00%, and now it is close to US$82.00 per barrel.
Weak economic growth is still the main theme of falling crude oil prices. In China, the Financial and Economic Affairs Committee announced last Friday that the government will take more measures to stimulate consumer spending and enhance local liquidity. However, officials did not provide important details about the stimulus plan. Chinese government's lack of specific plans has weakened investors' expectations, putting pressure on crude oil prices because investors were concerned about the slowdown in the world's second-largest economy.
At the same time, WTI crude oil has increased by nearly 25% since the formation of the triple bottom structure in June. Because the net long position of large speculators has fallen to the lowest point in 11 years (we have warned that its rising potential is limited), it seems reasonable for prices to fall back. Since then, large speculators and fund positions have begun to cover bears, which is an important factor leading to weak prices. We have indeed seen a decrease in the total number of bulls recently, which is also an ideal situation for a healthy bullish trend.
This is not surprising, considering that the news of the extension of production cuts and the new round of stimulus measures in China have weakened investors' expectations.
In terms of data, crude oil prices will get clues from the inventory data released by API and EIA later this week, and the substantial reduction in inventory will indicate that demand is picking up. On the other hand, rising prices may mean a downward trend in crude oil prices, because it means an increase in the supply level.
The inflation report of the U.S. economy may also affect the prices of crude oil and other commodities later this week, as strong price pressure may rekindle people's hopes for further tightening of the Fed's policies. In turn, this may lead to a stronger USD due to rising borrowing costs and risk aversion, thus suppressing crude oil.
On the other hand, weak CPI and PPI data may remind investors that the decision of the Federal Open Market Committee in September may still be suspended. Coupled with the weak non-farm employment data released last week, it may bring greater downward pressure on the USD and boost risky holdings such as commodities.
Technical Analysis
After two consecutive trading days of decline, WTI crude oil price is still above the upward trend line in the 4H timeframe. Nevertheless, a downward death cross is formed in the 4H timeframe, which can be seen as a bearish divergence; Therefore, falling below the support level may trigger a reversal of the rally.
Meanwhile, stochastics made lower highs while prices made higher highs. Similarly, the Relative Strength Index made lower highs while the price of crude oil made higher highs, suggesting that bearish pressure may be intensifying. Both oscillators have room to fall before reaching oversold territory to reflect short-seller exhaustion; therefore, the price may continue to follow.
However, the 100 SMA is still above the 200 SMA; therefore, resistance could reverse its downward momentum. In other words, the uptrend could still resume. The key will be the fight for the threshold of US$79.50. Meanwhile, the gap between the indicators is widening, reflecting the increasing bullish momentum.
Nonetheless, we still believe that the WTI crude uptrend has not been able to break out of its range-bound pressure since the formation of the triple bottom structure in June, and we expect that this momentum will still need to be maintained for some time. It is recommended to go short at the highs.
Trading Recommendations
Trading direction: Short
Entry price: 81.70
Target price: 74.35
Stop loss: 83.00
Deadline: 2023-08-22 23:55:00
Support: 79.71, 78.90, 77.21
Resistance: 82.14, 82.90, 84.53
