Oil is making a tepid rally after falling nearly $11 from the June 24th high of $61.57. Price has rebounded over $2 in the last 24 hours and the bearish slide may be taking a slight pause before resuming the longer-term bearish trend. This trend could last until the summer as long as OPEC does not cut production. Production is also still growing in the U.S. and oversupply concerns should keep oil below $65 for the rest of the year. If production has peaked, $65 could easily be tested and breached.
Major support for oil prices will come from the $50.50 area. If this level breaks, we could see a clear path to $45.00, with deeper support coming from the $42.00 handle.
The 60-minute oil chart displays the recent rebound could potentially form into a bearish butterfly pattern. Point D is targeted with the 141.4% Fibonacci expansion level of the X to A leg and the 161.8% Fibonacci expansion level of the B to C decline. If valid, we could see a strong reversal target the noted major support level.
The trade: Sell oil at $54.50, with a stop loss at $55.50 and take profit at $50.50. The risk/reward ratio is 1:4
Edward J. Moya
Senior Market Strategist
WorldWideMarkets Online Trading