Crude Oil: Fibonacci Retracements, Support and Resistance LevelsI've had the opportunity to closely observe the crude oil market's impressive run after its historic dip into negative territory in 2020. To better understand the market's behavior, I've outlined a Fibonacci pull from the low in November 2020 to the high in March 2022. In this idea, I'll discuss the importance of support and resistance levels, as well as Fibonacci retracements, in the context of trading crude oil.
Before diving into the technical analysis, let's first touch on the educational aspect of support and resistance levels. Support levels are price points at which an asset's price is more likely to stop falling and start rising, while resistance levels are the opposite - price points at which an asset's price is more likely to stop rising and start falling. These levels can help traders identify potential entry and exit points for trades.
Similarly, Fibonacci retracements are an analytical tool derived from the famous Fibonacci sequence. They are used to identify potential support and resistance levels by measuring the percentage retracement of an asset's price between a low and a high. The most common retracement levels are 23.6%, 38.2%, 50%, and 61.8% (the most important level).
In my crude oil analysis, the 50% Fibonacci retracement level sits at $66.29 on a log scale. We saw the price tap and test this level for a few days before witnessing a significant gap to the upside. What's particularly intriguing isn't the support we're finding at the 50% retracement level, but rather the support and resistance levels I've outlined at $61.35, $85.88, and $93.33.
Should the price fall below the 50% retracement level, we have the downside support at $61.35. On the other hand, if the price continues moving upwards, we can expect resistance at $85.88 and $93.33. The $93 level is near the 23.6% Fibonacci level, indicating that we may encounter significant resistance at this point.
A few days ago, we observed a sizable gap at around $80 after production numbers were released. Generally, production cuts lead to a higher cost for assets like crude oil, as supply shrinks while demand remains steady.
If oil prices surpass the resistance level of $93-$94, there's a high likelihood we could see oil reaching $180 in the coming years – approximately two years out. Although I would assign a 20% probability to this scenario, it's essential to note that support and resistance levels have proven to be crucial in the history of oil trading. Crude oil is unlike other assets and has a reputation for trapping the herd.
So, where do you stand in the herd today? Understanding and effectively utilizing Fibonacci retracements, support, and resistance levels can be the key to navigating the crude oil market and making informed decisions in your trading journey.
