3 Charts That Bode Well For Crude Oil... Almost

Posted by jbrumley on June 1, 2017 2:53 PM
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If crude prices can just get over a couple of nearby humps, the undertow will take care of the rest.

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Though they've been burned before, the proverbial natives are restless. That is to say, the oil bulls and would-be buyers are getting antsy in anticipation of a long-awaited breakout from crude, and there's good reason for the optimism.

On Thursday morning, MarketWatch's Mark DeCambre penned a piece pointing out how crude oil's chart was on the verge of a so-called 'Golden Cross,' where the 50-day moving average line crosses above its 200-day moving average line, signaling a major bullish undertow had developed. Though he misspoke about how this one is panning out, in spirit, he's exactly right -- the tide is turning.

As it turns out, there's good reason for the buy signal that almost is. A couple of other charts also suggest oil prices should be edging higher, and when one takes a step back and looks at a longer-term chart of crude oil itself, it becomes clear that a looming Golden Cross isn't the only thing working in crude's favor.

The first 'other' chart is a plot of the amount of oil stored in giant vats (or in tanker vessels) across the United States. For the eighth week in a row, it fell. It didn't just fall though. That slide is now accelerating as months of overproduction were finally brought to a halt. It takes some time for the excess inventory to work its way out of the system, but once it starts to do so, it's a tough train to stop. Look for crude stockpiles to continue slumping. As that supply shrinks, the law of supply and demand suggests oil prices will rise. They may not rise at a breakneck pace, but this falling chart works in favor of crude prices.

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Ditto for the chart of the U.S. Dollar Index. In that crude is priced in U.S. dollars, oil prices rise when the dollar contracts.

That's what the U.S. Dollar Index has been doing since January, but the heat got turned up on the selling effort last month, dragging the index under a key support line. For a brief while this week it looked like the dollar might rebound, but the sellers have hit it again, moving it to within an inch of a major support level at 96.8. If the floor at 96.8 should snap, there's not much left to slow down an ensuing selloff.

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Finally, in addition to the Golden Cross event about to take shape, the shape of crude oil's chart itself is telling.

There are a couple of things that bode well here. One of them is the fact that crude is almost into the tip of a wedge pattern (pink) that started to take shape back with early-2015's highs. The other is an impending cross above a technical ceiling at 52.12 (green) that may also be serving as the neckline for an upside-down head and shoulders pattern spanning from the latter half of 2015 and the first half of 2016.

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This setup can often act as a slingshot of sorts.

Neither of those clues are fully formed, but they're both close enough to keep a close eye on. Should crude break above the upper boundary of the wedge pattern and then hurdle the pinnacle ceiling at $55.36 -- where it peaked late last year -- raw momentum could take over then and really pressure prices higher.

There is a risk to such an outcome. That it, it won't likely last long. The higher oil prices go, the more apt oil companies are to produce, beefing the supply to levels that whittle crude prices lower again. [Discipline has rarely been the oil industry's strong suit.] But, there are varying degrees to how much they'll plow back into the business, just like there are varying degrees to how much crude oil prices might pull back when and if the $55/barrel mark is cleared. Once that ground is reclaimed, crude should at least hold its ground above the $54 area... give or take.

Of course, this is all preemptive. Crude has yet to clear its most immediate hurdles.

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