Crude Oil Finds Support at Its Pre-War Close, Gold Bounces and USD Retreats

WTI crude has surrendered all of its post-war gains, returning to a key technical inflection point. With bearish positioning stretched, gold rebounding and the US dollar retreating, the conditions are improving for a technical recovery in crude oil.

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WTI Crude Holds Pre-War Support, Gold Rebounds and USD Retreats

WTI Crude Finds Support at a Key Pre-War Level

It has been a turbulent four months for crude oil prices, to say the least. WTI crude surged more than 78% from its 27 February close to its 'war premium' peak just six trading days later. It has since fallen more than 40%, with frequent 20–30% swings before bearish momentum accelerated in early June.

What has caught my attention is that WTI crude has found support at its 27 February closing price of $67.02—the final settlement before weekend headlines triggered the initial surge in oil prices.

Given the significance of that level, I am on guard for a bounce, even if it is driven purely by technical factors. Bulls may also find support from a weaker US dollar heading into the weekend, while gold has already begun a countertrend recovery following an extended period of selling.

Brent crude briefly traded below its own 27 February closing price last week. However, with WTI finding support, it raises the potential for Brent to recover some of its recent losses. Given the strong correlation between the two benchmarks, both WTI and Brent have also failed to retest their 10-day moving averages for several weeks. With their RSI (14) in oversold territory and bullish divergences forming on RSI (2), the conditions appear to be falling into place for a bullish mean reversion.

Oversold Conditions Point to a Bullish Mean Reversion

Whether it can reach $80, only time will tell, and it may require a bullish catalyst to shake bears out of their positions. But given the depth of the decline without a meaningful pullback, a bounce to $80 may not be that difficult for a market that has been so volatile in recent months. Also note that the monthly pivot point and 20-month EMA converge around $80, making it a potential resistance zone should such a rally unfold.

Source: NYMEX, ICE, TradingView

WTI Crude Oil Futures (CL) Market Positioning | COT Report

Net-long exposure has fallen by around 50% over the past three months among large speculators. Most of this has been driven by a rise in short positions, although short exposure is now hinting at a sentiment extreme for WTI crude. Gross longs remain elevated compared with their December low, despite being pared back gradually in recent weeks. With prices having already sold off aggressively and surrendered all of their post-war gains, I suspect a swing low could be near for crude oil. Furthermore, last week's candle had its second-smallest range since the war, suggesting bears may be losing their grip.

Source: NUMEX, CME, CFTC (COT)

Gold and the US Dollar Could Help Fuel a Crude Oil Rebound

US Dollar Weakness Revives Gold Bulls

It is worth noting that gold has managed to rebound after several failed attempts to break below 4,000. While its broader bearish trend could eventually see prices break lower, gold is a good example of how bearish markets can still swim against the tide, at least temporarily.

Gold has reached the 4,200 handle and the monthly pivot point as it attempts to notch up a fourth consecutive bullish session. If the US dollar continues to retrace lower, a move towards 4,300 or even 4,400 could be on the cards. At the same time, I remain cognisant that bears may look to fade any such rally, potentially capping gains heading into next week. That said, gold does have a slight bullish edge in July based on seasonality, although average and median returns have historically been stronger in August.

US Dollar Pullback Could Support Gold and Crude Oil
The US dollar index formed a bearish engulfing candle on Thursday following the softer NFP report. That also suggests Wednesday marked a lower high, and attention now turns to whether bears can push the US dollar below the May high and monthly pivot point. If they do, it could bode well for crude oil and gold bulls over the near term.

Source: ICE, COMEX, TradingView

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-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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