Turmoil is hitting the global oil market.
Conflict recently escalated between Israel and Iran. The region plays a critical role in global oil reserves and production.
Iran is a top 10 producer and holds the third-largest oil reserves in the world. So Israel could target oil and gas facilities to apply economic pressure on Iran. It’s already struck oil and gas facilities.
But that’s not all.
Around 20% of the global oil supply flows through the Strait of Hormuz daily. The Strait is only 21 miles wide and is located off Iran’s southern coast. That makes it a critical chokepoint.
Oil prices immediately spiked due to fears of a supply disruption. Oil has gained 10% since the new war broke out. That’s led to a failed breakdown on oil’s chart and brought it right back to a key level.
Today, let’s unpack the recent action in oil prices and see where things could be heading next…
A Failed Breakdown
Before last week’s reversal higher, oil prices had completed a bearish chart setup.
Starting back in late 2023, oil started making a series of lower highs in price. At the same time, a support level emerged around $66. Oil has tested that level many times during the past two years.
The chart pattern is called a “descending triangle,” and you can see it highlighted below with the dashed trendlines.
At the start of April, oil completed the pattern by breaking below support at $66 (“1”). From there, the price fell another 14% to a low of $57. That was the lowest level in over four years.
But even before conflict in the Middle East broke out, we saw evidence of a reversal taking shape. Take another look at the chart:
As oil prices made a lower low in price at the $57 level (from “1” to “2”), the Relative Strength Index (RSI) made a higher low (bottom dashed line).
The RSI measures underlying price momentum, and it showed the downside move was losing steam.
That marked the low in oil prices, with the rally accelerating this past week. But now there are signs that oil may have gone too far, too fast.
Here are the key chart levels to watch for the next move…
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Testing a Key Level
The rally in oil prices looks like a failed breakdown from the bearish descending triangle pattern.
Failed chart patterns can lead to sharp reversals. But the rally is now getting stretched to the upside.
At the same time, oil is testing a key level. Let’s look at the chart one more time…
Oil prices are testing trendline resistance once again (see the arrow). That trendline has turned oil lower several times going back to 2023.
At the same time, the RSI reached an extremely overbought level (circle). The RSI jumped to 77; a reading above 70 is considered overbought.
The last time the RSI reached a similar level was in March 2022. That followed oil’s price spike when Russia invaded Ukraine. It gave way to volatile price movements over the next three months.
So it would not be surprising to see oil pull back from these levels in the short term.
This is a chart that’s worth watching long term, though. With growing geopolitical uncertainties, we can expect plenty more volatility in oil prices in the months ahead.
Happy Trading,
Larry Benedict
Editor, Trading With Larry Benedict
P.S. We’ve been following this trend for some time now… Oil continues to look interesting for trade setups, and we’ve kept it as one of our themes in One Ticker Trader for that reason. If you’d like to be in on my next trade recommendations, then be sure to check out how to join us right here.
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