In a complete opposite move of 2019, oil started off 2020 with a sharp downtrend. From January 7th through February 4th, oil declined 16 out of 20 trading days. Price reached a high of $65.65 and declined reaching a low of $49.31, representing a nearly 25% drop. However, there are reasons to believe that oil is set up for a bounce from here. Looking back to early 2019, oil is hovering around an important level of $50 per barrel, an area where three large advances started in the past. The technical indicators of Relative Strength Index (RSI) and Slow Stochastics are also deeply oversold, suggesting at least a bounce to reset the oversold conditions.
The primary difference between now and last summer when it tested the $50 level, is the RSI. The RSI is a momentum oscillator, which can indicate overbought and oversold conditions. The three tests of the $50 price level that started in June 2019 saw increasing RSI levels on each successive touch of $50, which price followed through with higher prices in the following months.
Sometimes, though, extreme readings can be seen when a new trend is emerging. The RSI indicator currently looks more like November of 2018 than the Summer of 2019. In November 2018, price consolidates in the low $50 range before breaking its recent low and falling another 20%. A repeat of this pattern could indicate that another low needs to be made on a positive divergence (lower price level, higher RSI level) before an extended bull move begins.
However, because the move this year was so steep, and how critical this $50 price level has been so significant over for the last four and a half years, there is a chance that the bottom has been seen.
Whether support holds near $50, or the recent low is broken, the daily RSI reading should be closely watched for indication of where oil’s momentum truly lies.