Crude Oil Price Forecast: Support Test Sets Up Potential Breakout

Crude Weakens as Price Tests Key Support Zone

Crude oil weakened on Thursday, as it established a slightly lower daily high of $60.93 and a lower low at $59.23, at writing. This puts crude on track to further test support near the confluence of the recent higher swing low of $58.67, a double bottom neckline at $59.00, a downtrend line, and the 20-day average at $58.79 currently. Sellers remain in charge as trading continues near the lows of the day. This could result in a lower low for the day before the session ends.

Bullish Reversal Signals Remain Intact

Signs of a bull trend reversal were established last week on a breakout of a double bottom pattern, recovery of the 50-day average and downtrend line, plus a breakout above a lower swing high at $60.56. The first pullback following those potentially significant reversal signals ended on Monday with a higher swing low of $58.67. Also, the 20-day average recently crossed above the 50-day line for the first time since early August. This shows improving underlying bullish momentum. On Wednesday, an attempt to rally for another leg up failed Thursday, as a minor lower swing high was generated.

Key Levels Define Near-Term Direction

This leaves crude oil with two key short-term price levels. A sustained drop below the higher swing low could lead to a deeper pullback. Possibly, a drop below both the downtrend line and 50-day average, now at $58.63, could occur. Alternatively, key support levels are retained before buyers step up and drive a breakout above Wednesday’s high and therefore provides a continuation of the bullish reversal.

Bullish Bias Despite Short-Term Pullback

Given recent clear bullish signals, the more likely scenario seems to be a continuation strength triggered on the breakouts. Crude oil had been slowly grinding lower for months without making too much downside progress. Now that there have been several bullish reversal signals, the odds favor further strength. Given the bullish implications of recent price action, a drop below support may not go far before buyers take back control and recover key levels. A bullish trend reversal may just be getting started.

Weekly Chart Raises Caution Despite Upside Potential

Regardless of the potential for bullish continuation, the weekly chart causes concern. Last week – the breakout week – ended with a bearish inverted hammer and a close in the lower third of the week’s range. This bearish pattern is only valid if last week’s low of $58.50 fails as support. Bearish confirmation would be given on a daily close below the week. Otherwise, further strength initially targets the 200-day average, now at $62.60.

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