WTI Oil Technical: Time for a potential short-term pullback

• Recent bullish breakout from “Descending Wedge” has led to a 10% rally to reach a medium-term resistance zone of US$83.80/84.90.
• Technical elements are now advocating a potential corrective pull-back with supports coming in at US$79.80 and US$77.20.
• Today’s surprise three interest rate cuts by China’s central bank, PBoC has triggered a risk-off behaviour in cross-assets (FX, stock indices, commodities) via a negative reflexivity feedback loop.

This is a follow-up analysis of our prior report, “WTI Oil Technical: Potential bullish reversal Descending Wedge in play” published on 21 July 2023. Click here for a recap.

The price actions of West Texas Oil (a proxy of WTI crude oil futures) have indeed shaped the bullish breakout from its “Descending Wedge” configuration on 24 July and rallied by +10% to print an intraday high of US$84.92 per barrel on last Thursday, 10 August which coincided with a medium-term resistance zone of US$83.80/84.90 (see daily chart).

Today, West Texas Oil has shed almost -1% intraday at this time of the writing to print an intraday low of $81.60 that recorded an accumulated loss of -3.7% in the past two sessions since Thursday, 10 August high of US$84.92.

The current weakness of oil has been in line with a broad-based risk-off behaviour seen in cross-assets today (FX, major stock indices & industrial metals commodities) attributed to the contagion fear in China’s financial system after a major trust fund failed to make timely payments to holders of its wealth management products that are backed by unsold properties of indebted property developers.

Today’s unexpected interest rate cut by China’s central bank, PBoC on its 1-year medium-term lending facility (MLF) interest rate by 15 basis points (bps), more than the previous 10 bps cut implemented in June to bring it down to 2.50%, its lowest level since late 2009. The 1-year MLF rate is a benchmark interest rate in China where PBoC provides a credit line to major commercial banks which in turn acts as a guide for another two benchmark interest rates that commercial banks charged to customers: the 1-year and 5-year loan prime rates.

Interestingly, PBoC enacted two more interest rate cuts today on the overnight standing lending facility (SLF) which was cut by 10 bps to 2.65% while the 7-day and 1-month SLF rates were cut by 10 bps each to 2.80% and 3.15% respectively.

Three interest rate cuts in a single day are considered a “rare” event in China given that the current guidance from China’s top policymakers is in favour of targeted stimulus policies to address the current economic growth slowdown rather than enacting “opening the liquidity floodgate” measures.

Hence, today’s surprise move on China’s more accommodative monetary policy stance is perceived as a heightened red alert on its financial system where trust firms’ default risks have risen that may trigger a systemic contagion which in turn created the negative reflexivity feedback loop seen today.

Daily RSI oscillator conditions suggest an imminent short-term pull-back

Fig 1:  West Texas Oil medium-term trend as of 15 Aug 2023 (Source: TradingView, click to enlarge chart)

The daily RSI oscillator flashed a bearish divergence condition at its overbought region on 9 August 2023 which suggests that the medium-term upside momentum of West Texas Oil is overstretched, and its price actions face the risk of a corrective pull-back to retrace certain portions of the current 26% rally of its medium-term uptrend phase from 28 June 2023 low of US$66.95.

A bearish breakdown below minor ascending channel support

Fig 2:  West Texas Oil minor short-term trend as of 15 Aug 2023 (Source: TradingView, click to enlarge chart)

Today’s price actions of West Texas Oil have staged a bearish breakdown below its minor ascending channel support from the 28 June 2023 low.

Watch the US$83.80 key short-term pivotal resistance to maintain the short-term bearish tone to see the next support coming in at US$79.80 and a break below it exposes US$77.20 next (also the key 200-day moving average).

On the flip side, a clearance above US$83.80 invalidates the corrective pull-back scenario for a retest of the 10 August 2023 swing high area of US$84.90 and a clearance above it sees the next resistance coming in at US$87.00 (psychology level & Fibonacci extension).

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