On Friday I saw two opposing headlines regarding oil on one financial website: (1) No worries, oil isn't going any lower, and (2) Oil may go to $20. Before we clutch our head in both hands and cry, "It's so confusing!", let's look at some charts.
First, the one-year chart of USO shows a bounce off the bottom of the declining trend channel in November. The rally failed rather quickly, and price broke down through two lines of support.
Next, the weekly chart shows USO well below the long-term support of the 2009 low; however, $WTIC shows that price is still slightly above the 2009 support at 33.55. The reason for the difference between the two is that USO reflects the overhead costs of maintaining a portfolio of futures contracts, but I believe that the long-term support on the $WTIC chart is the most relevant psychological level of support.
Now, looking at a really long-term chart of $WTIC we can see that not only is the 2009 low an important level of support, it also happens to mark the top of a long-term trading range between 10 and 35-40. While this fact strengthens the current support level, the chart also reveals the earlier trading range and allows for the possibility of lower prices.
CONCLUSION: There is very strong technical support for oil at current levels, but I have no trouble imagining it trading as low as 10 on a technical basis. Let's look for clear evidence that support is going to hold before we become too optimistic.
Technical analysis is a windsock, not a crystal ball.
