Oil is approaching a critical level.

A little more than five weeks ago, oil was trading for more than $50 per barrel.

[ad#Google Adsense 336×280-IA]The price had rallied 90% in just four months.

Most of the talking heads on financial television were wildly bullish, calling for a move to $60, $70, or even $100 per barrel.

We offered a different opinion.

When we last looked at an oil chart, we saw a bearish rising-wedge pattern.

Most of the time, this pattern breaks to the downside.

If that happened with oil, we were looking at a selloff to $43 per barrel, or – if things really got nasty – as low as $35.

After last week’s decline, oil is now approaching our first downside target…

Take a look…

Oil broke down from the rising-wedge pattern. It’s now trading just above an important support line at about $43 per barrel. This is a logical spot to look for at least an attempt to bounce higher.

In a strong, bullish, intermediate-term trend, traders could expect oil to hold support right here, reverse, and start a new rally that leads to a higher high above $52.

But that bullish argument has a problem.

Look at the moving average convergence divergence (MACD) momentum indicator at the bottom of the chart. This is a gauge of the strength of the current trend.

As oil has fallen over the past few weeks, the MACD indicator has fallen right along with it. That tells us this downtrend is strong… So the first bounce attempt off support is likely to fail. Oil should pull back and drop to a lower low.

In other words, oil may not hold support at the $43 level. That should be worrisome for oil bulls, because the next support line is all the way down at $35.

On the plus side… A decent bounce here should help set up “positive divergence” on the MACD indicator on the next move lower. Positive divergence occurs when a chart drops to a lower low but the MACD indicator forms a higher low. It’s often the first sign of an impending reversal in a trend.

There isn’t any positive divergence on the chart just yet. Even though oil should attempt to bounce off the $43 level soon, it’s too early to be looking for a reversal of the current downtrend. Any bounce will likely be short-lived.

Oil prices have lower to go.

Best regards and good trading,

Jeff Clark


Source: Growth Stock Wire