Crude Oil Breakout Signals Trend Reversal Ahead

What to Know

• Crude oil shows strengthening demand with multiple bullish reversal patterns forming. 
• A double bottom breakout on a close above. 
• Possible test of key resistance at $60.56-$61.24 near the 20-week average. 
• A sustained close above this zone signals a broader trend reversal.
• Next upside targets cluster near $63.95-$64.25.

Improving Demand and Bullish Reversal Signals

WTI crude oil is starting to show improving demand that points to higher prices. Last week, it established a bullish outside week with a strong close and a five-week closing high. Strength was also indicated by a weekly close above the 10-week moving average and last week’s high. In addition, a double bottom reversal pattern triggered above the neckline at $59.00. But it was not confirmed with a close above that level. Nevertheless, these are bullish signs that need to be followed by continued strength. 

December Swing High and Near-Term Resistance Test

The next key test of price structure is at the lower swing high of $60.56 from December, which is also a high for that month. A falling 20-week average is close by, at $60.13 currently. A close above either will further confirm strength of the counter-trend rally and signal a bullish reversal as a lower swing high will be violated. Given new signs of bullish momentum, it looks like there is a good chance that the swing high will be reclaimed, leading to a test of resistance near the 20-week average. 

Role of the 20-Week Average as Dynamic Resistance

The 20-week average has marked dynamic resistance since it failed as support in early-August. It was then successfully shown as resistance for eight weeks before sellers drove price lower. The current advance is the first week since late-September that the 20-week average will be approached. Therefore, the reaction of price near that average will be key to determining what might come next. Typically, the first test after some months is anticipated to encounter resistance, followed by a pullback or consolidation. The downtrend based on the 20-week average remains in place until there is a close above that average. In addition, since the average shows a similar price area as the swing high, a significant pivot is identified that could see a sharp response following a breakout, if it were to occur.

Initial Upside Target Zone and Measured-Move Signals

An initial target zone is identified a little higher than that first price zone by three indicators from $60.88 to $61.24. The range begins with a 50% retracement of an internal downswing and is followed by a 127.2% projection of a rising ABCD pattern, highlighting a measured-move extension within a broader recovery. The target range ends with a 38.2% Fibonacci retracement of an internal downtrend. This is the first upside target zone, but since another bullish reversal signal will trigger on the way to the price zone, higher targets should eventually follow. 

Monthly Chart Breakout and Trend Reversal Implications

Since the $60.56 swing high is resistance from December, a monthly bullish reversal will trigger above that price level, adding to the significance of the breakout. A higher monthly low for January was established at $55.82. January is the sixth month of a downtrend that followed with consistent lower monthly highs. If the December peak is reclaimed a bullish reversal on the more significant monthly chart will trigger. This adds to the potential for higher prices following a monthly breakout. 

 

Higher Resistance Zones and Long-Term Target Outlook

There are two potential target zones above the $61.24 level starting with a range around $62.27 – $62.49. Another key price area is referenced by the 50-week average, which provides a high target following a reclaim of the 20-week average. Currently, it sits at $63.97 and is accompanied by two retracement levels from $63.95 to $64.25. That range is a higher target but since dynamic resistance represented by the 50-week line is falling, the average will soon be below that retracement range and represent a lower potential resistance area.

Summary Outlook

In summary, a confirmed breakout with a close above the $59.00 swing high leads to a challenge of resistance near the 20-week average. If 20-week average can be reclaimed with a close above it, the bull reversal has a chance of continuing towards the 50-day average. 

 

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