Bearish Divergence in Crude Could Signal Rejection From Consolidation Range Extreme

December 7, 2016 2:17AM CST

Oil mounted a tremendous rally last week following OPEC’s decision to cut daily crude oil production 1.2 million barrels per day, yet the recent technical action has traders reconsidering whether this rally is sustainable.  Despite the large move in F’17 crude prices, the market remains within a trading range that has been several months in the making.  Monday’s rally produces a high trade of 52.42, just shy of the previous highs in October around 52.70.  A further look at the RSI on the 30-minute chart identifies a potential bearish divergence between momentum and price on throughout the recent rally which could allude to underlying weakness in the market.

Given the lack of upside follow through in the oil market today, traders are begging to know whether or not last week’s decision will be enough to produce a directional breakout to the upside, or if the recent rally is simply going to be a selling opportunity in a range-bound market environment that has dominated the crude futures since July.  The upper band of said range can be seen from 51.55 – 52.66 and, if traders believe that the market will produce downside follow through on the bearish divergence signal seen in the RSI, this area may provide a valid entry zone for short positions.  However, if participants received a bullish EIA report tomorrow at 9:30 AM CT, this could be enough to produce an upside breakout from the current consolidation range, thus negating the current bearish divergence signal.


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