Tuesday, November 16, 2010

Bloomberg Analysis: Crude Oil May Plunge as Prices Diverge From Strength Index

Crude oil may plunge below $80 a barrel in New York as the failure of its relative strength index to keep pace with price gains signals that this month’s rally is over, according to technical analysis by Commerzbank AG. Futures surged to a two-year high of $88.63 a barrel on the New York Mercantile Exchange on Nov. 11. On that day, oil’s 14 day RSI, a measure of how rapidly prices rise or fall in that period, failed to surpass a nine month peak reached in October. That indicates the gains have run their course and a downward correction may be imminent, Commerzbank said.

“This suggests a loss of upside momentum,” London based analyst Karen Anne Jones said in an interview. Oil, which traded for $83.47 at 14:19 p.m. London time, earlier today broke a trend line that has supported prices since September at $83.88, and is set to plummet, Jones said. The 14 day RSI was at 50.8.

“The market is sitting today on the two month uptrend, and this is now exposed,” she said. “Failure looks likely and will spell a deeper retracement.” Once crude drops below $83.88 it will be drawn toward a range of $78.50 to $79.31 within three weeks, according to Commerzbank. This price band combines a threshold from the Fibonacci sequence of numbers, with the convergence point of two moving averages.

A move to the $78.50-$79.31 area would complete a 38.2 percent reversal of oil’s advance since May, Jones said. The significance of a 38.2 percent movement derives from the Fibonacci sequence, used by traders to predict points of resistance and support as markets repeat earlier moves. This region is also where crude’s 100 day and 200 day averages cross. The 100 day and 200 day rolling mean are both at $78.57 a barrel.

Bloomberg reporter Grant Smith can be contacted at gsmith52@bloomberg.net


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