Cloudy Picture for Oil

Oil's fall was good for the economy, as lower prices suggested less inflation, and thus the Fed could ease off the rate-hike cycle. It was then that the market began its move upward. After a nearly six-month drop, oil bottomed and has since risen over $10 off its January $51.03 low. However, the chart remains bearish. Let's take a look at what barriers stand in the way of another upswing in oil.

Can the Bulls Retake Control?

Oil's initial bottom from the decline was at $57.05 per barrel in late October, a three-and-a-half-month nearly 30% drop from $79.86. At that point, being heavily oversold, oil began to bounce. It then took two months to get up to the $64.15 level.

The pattern it formed on that move is called a rising wedge, meaning a small incremental move higher that allows the oscillators to unwind from oversold. Once the unwinding was over, the commodity fell out of the wedge to a new January low at $51.03. The bulls were not happy, and the bears were celebrating.

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Technically speaking, the new low at $51.03 also had a higher MACD than the $57.05 low, so we had a positive divergence, the first longer-term positive divergence in a long time. Like clockwork, the price of oil shot all the way to $63.38. This was close to the wedge high at $64.15, but it fell short, thus not creating as bullish an inverse head-and-shoulders pattern as we'd like. And an important point to note is the black candle the day it hit $63.38. This means it gapped up but closed on the lows, a big failure just below the equal highs, and price has yet to recover. So what is the chart telling us now?

Bearing Down

If you're bullish, the picture is not a happy one, but if you're bearish, things are looking pretty good. When the stock put in that gap-failure candle in early March, it kept on falling to where it is today. On the way down it had a huge gap from $61.50 to $60.00. That will now act as major resistance to any moves higher. Also, there was a lot of technical damage done over the few days from the gap failure day to the present. The MACD is still pointing down, as is the RSI.

For now, the commodity is not very playable on either side, with the recent $51.03 low still a ways away and powerful resistance a few dollars above. However, the trend is lower overall. This will be very difficult for anyone to play, and we won't know for sure which way it's going until it makes the breakout or breakdown move down the road. It must take out the $64.15 wedge top to become truly bullish, but it must also lose $51.03 to become truly bearish.

One of the easiest ways to get totally frustrated playing anything in the stock market world is to play between support and resistance. I feel the overall trend is lower, but it's in between big support and resistance, so it's best to probably remain mostly on the sidelines. The bulls and bears have their reasons for believing what will happen next, but it would be best to let the real world make that decision before you get too involved.

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At the time of publication, Steiman had no positions in the stocks mentioned, although positions may change at any time.

Jack Steiman is president of TheInformedTrader.com, for which he also conducts live seminars, and Steiman New Research Group, LLC. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Steiman appreciates your feedback; click here to send him an email.