The Hindu Business Line : Light crude likely to reverse

With the crude prices gaining over 50 per cent this year, most market watchers are wondering how long this scorching rally would last. In technical analysis, there is a premise “History repeats itself”. In July 2006, light crude encountered resistance at around $80 and declined. It was on a downtrend till early January 2007 and finally bottomed at the trough at $50.

The commodity is nearing one such resistance currently and could begin a short term downtrend soon. In early February 2008, the uptrend from the $50 trough in light crude accelerated and broke thought the significant, psychological resistance level at $100. On July 11, the light crude recorded its life time high of $147.27 and experienced selling pressure. It ended the day at $145. We believe that $150 level would be a key, psychological resistance for the light crude in upcoming session. Light crude has formed a hanging man candlestick pattern in the weekly chart.

This pattern occurs at market tops. We note that the daily moving average convergence and divergence (MACD) oscillator is displaying negative divergence. The weekly and monthly MACD are hovering in the overbought territory. The weekly and monthly relative strength indexes (RSI) are also behaving likewise.

The implication is that the commodity is losing momentum and a downward reversal is possible soon. Considering the above bearish factors we anticipate that the light crude is likely to test the uptrend channel and psychological resistance at round $150 and reverse from this level in the near future. This reversal could be for a short-term only as the long-term uptrend is still in place.