US crude oil for Jan 2016 delivery settled at $35.36 a barrel on Friday, approximately $1.4 equivalent to 3.1 percent lower from its prior settle price of $36.76 per barrel, hitting 2009 lows! Apparently, investors are more bearish on oil than they were during the Financial Crisis, but the question is: how far this plunge will continue?
Freefalling of prices triggered after that the Organization of the Petroleum Exporting Countries (OPEC), failed to agree to a production ceiling on the meeting held on December 4th in Vienna.
This oversupply for oil appears to be another battle from the top crude exporter, Saudi Arabia, to hold its market share despite the disagreement of other members including Iran and Iraq.
From a technical point of view, we may not be that far away from a true bottom and its most likely that the shorts would take profit and exit somewhere near these levels. Although it does not mean that we will encounter a sharp bounce as long as there is not a shining outlook in near future in the global economy.
Although fundamentals still remain bleak, the question here is how much more aggressive can sellers be when the downside becomes more limited?
Technically speaking, oil began to form a five-wave downward trend in terms of Elliott Wave Analysis from $112.20 hit on August 2013. Falling to $91.20 per barrel is considered to have formed wave 1 which afterwards rallied to $107.60 on June 2014 and is considered to have been wave 2 which retraced 78.6 percent of wave 1. This six month uptrend broke down at $103 on July 2014 where prices apparently started to plunge sharply after breaking the psychological level of $100 per barrel. This freefall slowed at around $43 per barrel where the black gold lost almost %60 of its value afterwards, forming wave 3. This wave expanded wave 1 to almost 2.618 ratio of its size. By hitting these levels, prices failed to drop further for almost two months and began a correction (wave 4) which couldnt last more than $62 a barrel and bounced back down to form the last bearish wave(wave 5), in which we believe we are existing in at the moment.
In addition, as it is depicted in the daily chart below, oil prices have formed a falling wedge price pattern since June 2015 which implies a strong support at around $31 and can be the target for wave 5. This level also projects the 61.8 % expansion ratio of previously mentioned wave 3 from the end of corrective wave 4. On the other hand, the break throw the solid resistance at $40 level would be an initial signal for a possible reverse in the current bearish trend.