Oil May Drop Because of ‘Bearish Trifecta’: Technical Analysis

Oil may fall as a “bearish trifecta” of technical indicators leave the market vulnerable, according to an analysis by Auerbach Grayson.

Futures are “overbought” after surging 27 percent from a low of $83.85 on Feb. 15 to a high of $106.95 on the armed conflict in Libya, said Richard Ross, an analyst at Auerbach Grayson, a New York brokerage.

The Relative Strength Index for crude oil formed a “negative divergence” pattern, Ross said, where prices rose to new highs during the same period that the RSI formed a lower high. “While prices appear firm ‘on the screen,’ underlying momentum has ebbed and the technicals may be eroding,” Ross said.

A final bearish indicator is that oil tested an area of $106 to $107 a barrel on Feb. 7 to Feb. 9, and again beginning on March 23, a so-called double-top formation, according to Ross.

“While prices appear strong, the technicals suggest otherwise,” Ross said in a telephone interview. “In our experience, buying crude oil against this litany of bearish evidence which we have outlined is not a strong play.”

Crude oil for May delivery fell 52 cents, or 0.5 percent, to settle at $104.27 a barrel yesterday on the New York Mercantile Exchange.

“Should crude fail around current levels as our analysis suggests, we would expect an initial downside test of $98 in short order,” Ross said. “From there a test of $92 must be considered.”

A settlement above $106 a barrel would invalidate the analysis and set futures up to test the next target of $109, Ross said.

To contact the reporters on this story: Mark Shenk in New York at mshenk1@bloomberg.net

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.