Without a doubt, October was the worst month for oil bulls since May 2012. In the previous month, the commodity lost over 11% as the combination of a stronger greenback, rising supplies and weaker demand weighted on the price.
Additionally, the first days of the new month have been very negative for oil investors. After the breakdown below the psychologically important barrier of $80, oil bears pushed the price lower and light crude hit a four-year low of $75.84, breaking under long-term support lines. In this way, the commodity posted its sixth weekly loss in a row. Will light crude drop any further in the nearest future? Is it possible that crude oil’s ratios will give us some interesting clues?
The first thing that catches the eye on the above chart is an invalidation of the breakdown above the upper line of the rising wedge. As you know, this is a strong bearish signal, which suggests further deterioration in the coming weeks. If this is the case, and we’ll see a corrective move from here, the initial downside target will be the lower border of the formation. What does it mean for crude oil? When you take a closer look at the above chart, you will see that may times in the past local tops in the ratio have corresponded to the crude oil’s lows. We saw such price actions in May 2010, Feb 2011, Jun 2012, May and Nov 2013.
Additionally, the RSI climbed to the 70 level and declined – similarly to what we saw in the previous years. Back then, such a high reading on the RSI preceded a move down in the ratio and an upward move in crude oil. Taking these facts into account, and combining it with a negative divergence between the indicator and the ratio, we think that history will repeat itself once again and we’ll see a corrective upward move in crude oil in the near future. When we factor in the position of the CCI, we clearly see that the indicator is overbought (and there is also a negative divergence), which is another bearish signal for the ratio.