Oil tests consolidation principle

09/16/20
  • Crude oil sold off more than 13% to start September
  • Correction dropped market to support-resistance zone
  • Consolidation a pause in down move or potential reversal?

Does price action follow the news, or is it the other way around?

On Monday the Organization of the Petroleum Exporting Countries (OPEC) lowered its forecast for global oil demand growth this year and warned of a shaky outlook for the first half of 2021.1 Yesterday, the International Energy Agency (IEA) echoed that sentiment, stating demand would “decelerate markedly” in the second half of 2020, and the pandemic-induced economic slowdown would take “months to reverse completely.”2

While it would be perfectly natural to think such forecasts would weigh on crude oil prices, the market declined only modestly on Monday and posted a huge gain on Tuesday (+3% intraday). Of course, as the following chart shows, oil was still just a few days removed from a 13% sell-off that dropped November WTI crude futures (CLX0) to their lowest level since early June:

Chart 1: November WTI crude oil (CLX0), 4/9/20–9/15/20. WTI crude oil futures chart. Pause or reversal?

Source: Power E*TRADE


Was the market, as many traders argue it often does, leading the news?

As of yesterday, the downturn had bottomed on September 8 at $36.58/barrel—in the price zone that had previously functioned as resistance to rallies in April and May, then as support for a pullback in June.

Some traders gauging which way the market may turn next would consider the recent consolidation, punctuated by yesterday’s rally, as a successful test of support.

Other traders—and this would include those who saw the preceding sell-off as evidence of the fundamental pressures that just made headlines the past couple of days—would probably be more inclined to see the current consolidation as an interruption of a possibly larger down move, based on the following technical principle:

All else being equal, prices are expected to exit a short-term consolidation in the same direction they entered it.

In other words, if an up-trending market consolidates, traders with this outlook would lean toward an upside breakout of the consolidation. Conversely, they’d expect a down-trending market that consolidates to follow through to the downside.

Of course, this is a principle, not a law—and it’s just one potential decision-making input among many. In the absence of contradictory factors, traders tend to avoid “fighting the tape.” But they also know that tape can change its tune on a dime.

Today’s numbers (all times ET): Mortgage Applications (7 a.m.), Retail Sales (8:30 a.m.), Business Inventories (10 a.m.), Housing Market Index (10 a.m.), EIA Petroleum Status Report (10:30 a.m.), FOMC announcement (2 p.m.).

Today’s earnings include: Herman Miller (MLHR).

 

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1 The Wall Street Journal. OPEC Extends Forecast for Decline in Global Oil Demand. 9/14/20.

2 CNBC.com. IEA cuts 2020 oil demand forecast, sees ‘treacherous’ path ahead with rising coronavirus cases. 9/15/20.

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