The continuous contract Light Crude Oil (WTIC) weekly chart has reached an inflection point in price. The intermediate term direction of the energy sector could be determined by the way it reacts at this critical juncture.
Crude oil arrived here by price action that, in retrospect, created a series of well-defined technical patterns. Beginning in 2015 and continuing through 2016, a large inverse head and shoulders pattern formed on the chart.
A false breakout from the head and shoulders pattern in early 2017 resulted in a retest of the pattern’s right shoulder support level. This support held and the price of crude oil reversed direction and started heading higher. Over the next year it rallied up to the $75 area, which was the original measured move price target of the head and shoulder pattern. The retest of right shoulder support also created a data point that defined an uptrend line originating at the 2016 low.
In October last year that uptrend line was retested and it failed the test. The price of crude continued to slide before finally holding at the $42 level. This level is also where it bounced in 2017 and is the head and shoulder’s right shoulder support level.
The bullish reversal off the $42 level has taken the price of crude oil back to the uptrend line which is now acting as resistance. At this point in time, trend line resistance is being reinforced by the intersecting 40 week (~200 day) moving average.
If the price of crude oil breaks through this multiple layer of resistance it is officially back on trend. The implication would be that it ultimately returns to the old highs. If, however, it fails to break through resistance and price fades back down, the result could be a return to right shoulder support in the $42 area.