The technical argument against oil is hard to ignore

For those who follow the oil market closely, it is hard to believe that there is such a compelling argument that oil prices should drop significantly. Yet markets act this way based on data that may not be truly credible. Adam provided a very comprehensive overview on this yesterday here. It’s a must read if you’re looking to find out what’s driving the oil market right now.

Although conditions remain tight and supply from most major producers is at full capacity, adding to the fact that global inventories are low, oil prices have not shown much confidence since mid- June. In fact, prices look poised for another weekly dip that will see it drop in 7 of the last 9 weeks.

I have no doubt that there are still plenty of oil bulls out there. For my part, I am always in this camp but as a trader, you must always respect the techniques. This is rule number one because it is how you define and limit your risk.

The picture above is rather bleak for oil, to say the least. The break below $90 and a drop below its 100 and 200 day moving averages suggest selling pressures are intensifying and there is potentially more downside to follow. The sellers are now in control and the sentiment is more bearish. I wouldn’t want to fight that, even though I think oil prices will go up.

The trendline support (yellow line) is the next key level to watch and is approaching $80 before getting to the level of the figure itself. Further decline below that will leave very little room for a dip to the December lows closer to $63-$65. I would say that this may be where oil may look like a fire sell, but we will have to see how market sentiment continues to play out before drawing any firm conclusions.

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