The WTI crude oil futures contract fell more than 5% before bouncing into Wednesday afternoon’s North American session, posting the biggest one-day decline in 13 months. The reversal has unfolded at long-term Fibonacci and pattern resistance, possibly signaling a multi-year top. If so, a slow and tortuous trip into the $50s for WTI is now possible, with newly optimistic energy bulls set to relinquish the majority of 2018 gains.
Major energy funds have diverged from the futures contract in recent months, stalling at 2016 resistance in January 2018 and dropping into sideways patterns while international trade tensions put a damper on buying interest. These instruments could complete topping patterns as well, rewarding aggressive short sale positions after they break the support levels outlined in the following charts. (See also: 3 Energy Stocks That May Drop as Oil Falls.)
The SPDR Select Sector Energy ETF (XLE) bounced to resistance at the 2008 high at $91.42 in 2014 and broke out, hitting an all-time high at $101.52 just two months later. The subsequent decline failed the breakout, ahead of a multi-wave downtrend that ended at a five-year low in the upper $40s in January 2016. The subsequent bounce stalled just above the 50% sell-off retracement level in the mid-$70s in December 2016, marking an impenetrable barrier for the past year and a half.
January and May 2018 reversals have carved the outline of a cup and handle breakout pattern, but time is running out following the crude oil reversal. Price action is currently basing on top of the 50-day exponential moving average (EMA) at $75, while a sell-off through the June low at $73.14 would set of preliminary sell signals ahead of a decline that could reach the 2.5-year trendline (blue line) at $67.50. It would take a break of that support level to set off a longer-term sell signal. (For more, see: XLE: Energy Select Sector SPDR ETF.)
The VanEck Vectors Oil Services ETF (OIH) has sharply underperformed other energy sub-sectors since the 2008 economic collapse and could lead the downside if crude oil enters a bear market. A bounce into 2011 reversed at the .618 Fibonacci bear market retracement level in the $50s, while a 2014 test at that level failed to trigger a breakout. The fund sold off to the 2008 low in January 2016 and turned higher, posting a lower high in the mid-$30s in December 2016.
A decline into August 2017 ended less than two points above nine-year support, yielding a bounce that carved the third lower high off the 2014 peak in January 2018. The fund failed to break out in a May recovery wave and has been losing ground since that time. The multi-year trendline of rising lows is now situated less than three points under the most recent closing price, with a breakdown setting off a major sell signal that could presage a trip into the lower teens.
The SPDR S&P Oil & Gas Exploration & Production ETF (XOP) has carved slightly stronger 2018 price action than its peers, with a heavier domestic weighting offering some insulation against international trade tensions. The ETF broke out above the 2008 high at $73.04 in 2014 and posted an all-time high at $84.04 just two months later. A decline into 2015 failed the breakout, with selling pressure continuing into a January 2016 test of the prior decade’s bear market low.
A bounce into December 2016 ended at the .382 Fibonacci sell-off retracement level, giving way to a pullback that posted two higher lows, followed by a failed January 2018 breakout attempt. The fund bounced to that level earlier this week and reversed with other energy funds following the crude oil downturn. A break of 50-day EMA support at $41.50 will now mark an preliminary sell signal, while a more destructive sell signal would erupt if a decline breaks the trendline at $33.50. (For more, see: 6 Lagging Oil Stocks Ready to Rebound.)
The Bottom Line
Crude oil posted its biggest down day in 13 months this week, after reversing at the five-year double top breakdown and .618 Fibonacci sell-off retracement level. This price action could signal the start of significant decline and possible end of the 2.5-year uptrend. (For additional reading, check out: Top Oil ETFs.)
<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>