LONDON: Oil futures have broken out of trading ranges seen for the last six months and are heading higher, with the benchmark US crude contract looking for a possible test of $90 per barrel, chartists said on Tuesday.
US light crude oil, also known as WTI, has risen almost 9 percent in the last six trading days and has built up a considerable head of steam with the move higher pulling in fresh buying from outside investors. But, like all the other major oil futures contracts, the sharp rally has pushed up relative strength indexes (RSIs) for all months, suggesting the markets are becoming overbought and making a brief pause likely.
"Technically, the momentum on WTI is very strong. So strong, that its velocity will be the main capping factor as it is flirting with overbought conditions on the RSI-14," said Olivier Jakob, head of consultants Petromatrix in Zug, Switzerland. "The challenge for technical and momentum traders is to maintain a momentum trade in an insecure fundamental picture that can trigger reversal in exogenous markets. That is making for trades that have shorter time duration," Jakob said.
"WTI has risen about $7 per barrel in five days and that makes $90 per barrel a possible technical target if the momentum can be maintained for a few more days," he added. The global commodities research team at Prudential shares a similar view: "There is little technical resistance to stand in the way of this rally until the market approaches the psychological $90 level and then hard resistance at $90.51 from September 2008," Prudential's technical analysts said in a note to clients.
But they add a note of caution. "We would suggest that the momentum studies in both daily and weekly timeframes are overbought and could be a reason to look for a setback in the next couple of trading sessions, though," it said. "On the premise that the current extension is being carried by new money allocations on the new quarter, this buying could be finished tomorrow .. and then the market would seem increasingly vulnerable to a setback."
Jakob at Petromatrix said he would not want to be long at $90 per barrel "as price reversals could be quick once the speculative profit-taking starts to kick in, (as) technical markets tend to fall faster than they rise".
