Oil: How Low Will It Go?

Naturally nobody knows, but the chart below makes a very compelling case for continued downside in this key commodity.

This technical case for oil to go lower from current levels rests on at least two factors. 

First is oil’s violent downside reaction out of five years of sideways congestion. This Triangle downside carries three strong targets, in my view, at about $44/barrel, $35/barrel and $14/barrel. Clearly, each is well below oil’s current levels and suggests the selling pressure will continue.

But how do we gauge what target may be the strongest? This brings us to the second factor or oil’s trading path in one of two long-term ranges for 30 years: the Ascending Trend Channel in blue and the Sideways Trend Channel in purple.

The former is far more bullish than the latter and it makes a very strong case for a bottom in oil around $44/barrel considering that its current support is right around that same level of $44/barrel. Interestingly, however, there are three ascending planes of support aligned with but below this Ascending Trend Channel marked in grey and the middle one is just below $35/barrel, and thus makes a decent case for oil to bottom around its 2009 lows.

Both of these possibilities are strong, in my mind, and leave little to no doubt that oil is going lower here with the fall to about $35/barrel appearing a bit more likely due to the fact that it is a truer representation of a bearish reaction from the large Triangle in red.

However, there is a wild case scenario for a massive fall in oil and it is made by both the Triangle and the possibility that oil’s true trading path will turn out to be sideways on a potential false initial reaction of epic proportions. This possibility cannot be ignored or discounted because it is simply too strong from a technical standpoint.

It is based on a fuller target from that Triangle of $13.65/barrel and the idea that oil is going to shift back down into its Sideways Trend Channel from about 1985 to 2000 and settle back into a range between about $10 and $30/barrel.

This may sound outrageous, but its odds appear fairly strongly in the same weekly chart above but one that has the last 15 years of trading action circled as what may prove to be a false initial reaction or basically a massive head fake caused by a variety of factors. Should oil convincingly breach the Ascending Trend Channel, this very bearish case should be taken very seriously even with the possibility of support near $35/barrel catching.

Clearly this would seem to be a tailwind for consumers, but the various shocks and possible financial market crashes that could be triggered by such a collapse in oil would not be, and thus this seems a very dangerous scenario indeed.

Nonetheless, there are more oblique reasons to believe that oil will bottom out near $35/barrel and that the middle case scenario may stand out as the strongest technical scenario for oil at this time.

But with the wide variance in these three cases on oil, it seems to make good sense to ask: how low will it go?

As always, thank you for taking the time to catch up on my thinking and Happy New Year!