Convergence of key levels provides major test for crude oil bulls

• WTI crude oil surges more than 2% on Monday
• US benchmark testing resistance zone including 50 and 200DMA and 38.2% Fib of Dec-Apr rally
• WTI struggled to break above $80 in May despite arguably stronger fundamental conditions
• US retail sales likely to be influential later Tuesday

WTI crude oil synopsis

Tuesday looms as a great day to wait and observe the price action in WTI crude following a powerful surge to start the trading week, leaving the benchmark US contract at a level it struggled to overcome in the recent past. Its performance today may provide a strong signal on whether to get onboard the bullish move or get setup for shorts on a possible swing top.

WTI slogging it out with sellers at familiar level

You can see how powerful the rebound in WTI has been since June 5 with the bullish engulfing candle of that day kicking off what’s turned into an impressive move, fuelled by short covering and a perceived lessening of risks surrounding the demand outlook. It’s exceeded where I thought it would get to which means I’m reluctant to chase it higher, unless the price makes a compelling case to do so.

I don’t think we’ll have to wait long for the signal.

After Monday’s more than 2% pop which came out of nowhere on the back of decent volumes, WTI has found itself at a key level on the daily chart, testing a zone that includes the 50 and 200-day moving averages and the 38.2% Fibonacci retracement from the December low-April high.

One glance at the chart shows how difficult WTI has found to push beyond this level recently, unable to break higher despite an arguably more compelling fundamental backdrop than what we find today.

I’m cautious on the move now. We saw a similarly fat bullish candle on May 28 that saw the price close above the 200DMA and 38.2% Fib only to reverse hard a day later. While it’s not definitive yet, we could also be looking at divergence between price and RSI, with the former yet to confirm the higher highs on the latter. That may arrive in the sessions ahead but it’s another reason to be cautious near-term.

Near-term patience may pay

As I did at the swing bottom earlier this month, I’m going to wait for the price action to tell me what to do. Should WTI fail to break and close above the resistance zone, consider initiating shorts with a stop above it for protection. Possible trade targets include $77.68, the 50% retracement of the Dec-Apr move, or even $76.15 where the rebound stalled briefly earlier this month.

Should the resistance zone give way, which could come with a flourish given the likelihood of stop-loss orders parked above, wait to see whether the price manages to close above the level. If it does, consider initiating longs with a stop loss below the 200DMA for protection. Potential targets include $82.94 and $84.50.

US retail sales should be on the radar

As mentioned in an earlier post, with the supply side of the equation now largely accounted for thanks to the production guidance from OPEC+ provided in early June, it’s really demand that’s in the driving seat. That makes Tuesday’s US retail sales report and weekly crude oil inventory data from the EIA important events from a fundamental perspective this week.

-- Written by David Scutt

Follow David on Twitter @scutty

How to trade with City Index

You can trade with City Index by following these four easy steps:

1. Open an account, or log in if you’re already a customer 
   
   • Open an account in the UK
   • Open an account in Australia
   • Open an account in Singapore
   
   
2. Search for the market you want to trade in our award-winning platform 
3. Choose your position and size, and your stop and limit levels 
4. Place the trade