WTI: About time for a bounce?

November 16, 2015 02:59 PM

After starting out on the back foot, so-called “risk markets” have found their bullish stride heading into afternoon U.S. trade. Of course, this weekend’s tragedy in Paris remains on the forefront of everyone’s mind, but traders are simultaneously looking ahead to the potential economic fallout from the terrorist attacks.

If global consumers are fearful enough to avoid or postpone purchases, there could certainly be a negative medium-term economic impact, but this effect would likely be at least partially offset by easier monetary policy from central banks.

Indeed, ECB executive board member Peter Praet expressed similar sentiments in an interview with Bloomberg TV earlier today. Praet noted that, “Usually these sorts of events have a transitory effect on the economy so this is not a priori a reason to change the way we see the evolution of the European economy.” It’s also true on the other hand that we have a fragile cyclical recovery, fragile with downside risk, and it’s clear these sort of events do not help restoring confidence in the recovery, so this is something we will watch.” In a separate interview, the ascendant US “bond king” Jeffrey Gundlach also highlighted that the attacks decrease the probability of the Federal Reserve raising interest rates next month, at the margin.

Turning to the ultimate scorecard (the markets), it appears that the prospect of easier global monetary policy is outweighing the negative economic impact of this weekend’s horrific events. U.S. stocks have turned definitively higher, with both the S&P 500 and Dow Jones Industrial Average trading 1% higher as of writing, while the yield on the 10-year U.S. Treasury bond has dipped to 2.27%.

The most impressive move of the day may be in crude oil. The morning started out well enough for bears, with the West Texas Intermediate (WTI) contract trading down for the ninth (!) consecutive day and testing key psychological support at 40.00. However, the risk-on tidal wave overwhelmed sellers starting at 11:00 ET, and WTI has now rallied to test 42.00, up nearly 5% from the lows and 2% from Friday’s close.

While it remains to be seen whether WTI can hold onto its gains, the daily chart is currently displaying a Piercing Candle*, showing an intraday shift from selling to buying pressure. Meanwhile, WTI remains deeply oversold, with the slow stochastics indicator still below the 20 level, so there could be room for a more substantial bounce this week. If we do see a meaningful bounce emerge over the next few days, the key barrier to watch will be 43.50, which is a major previous-support-turned-resistance level. It seems logical that any counter-trend rally could stall out around the area, and bears who missed last week’s breakdown may welcome a second chance to sell so-called “black gold.”

*A Piercing Candle is formed when a candle trades below the previous candle's low, but buyers step in and push rates up to close in the upper half of the previous candle's range. It suggests a potential bullish trend reversal.

About the Author

Senior Technical Analyst for FaradayResearch. Matt has actively traded various financial instruments including stocks, options, and forex since 2005. Each day, he creates research reports focusing on technical analysis of the forex, equity, and commodity markets. In his research, he utilizes candlestick patterns, classic technical indicators, and Fibonacci analysis to predict market moves. Weller is a Chartered Market Technician (CMT) and a member of the Market Technicians Association.