A close technical analysis of crude oil could reveal that the commodity is in for a major turnaround.
Crude oil, which is down 9 percent year to date, is oversold, according to Piper Jaffray managing director and technical market strategist Craig Johnson. He also recommends taking bullish positions on energy stocks, which tend to move in tandem with crude oil.
The commodity’s oversold condition can be found in charts of crude oil over the past year, according to Johnson. He zooms in on a few key technical indicators: moving averages, the relative-strength index, the money-flow index and its moving average convergence/divergence indicator.
“All these pieces, when you put them together, suggest that crude oil is oversold and due for, I think, a pretty healthy bounce,” Johnson said Friday on CNBC’s “Trading Nation.”
Crude oil has appeared to hold steady in the past year each time it’s gotten down to its 40-week moving average, then emerging with a meaningfully rally, Johnson said, examining a chart that shows an upward-sloping channel.
“Something similar looks like it’s unfolding right now that could take the oil price back above $50 and then maybe as high as $55. So definitely like what we’re seeing here, for at least a short- to intermediate-term trade and maybe a little longer,” he said.
Johnson sees promise in crude oil’s moving average convergence/divergence oscillator, which generally measures an asset’s momentum and strength.
Crude’s relative-strength index is yet another technical indicator that shows momentum. The indicator measures an asset’s price movement — and the speed at which it moves — as an indicator of its strength.
And finally, the money-flow index, which measures inflows and outflows into a security over a given period of time, indicates an oversold technical condition as it nears the 20 mark.
In the intermediate term, crude oil could see a rocky ride if the U.S. dollar rallies as expected, said Max Wolff, market strategist at 55 Capital. A stronger U.S. dollar is generally a negative for the dollar-denominated commodity.
“We’re going to see a stronger dollar and softening global growth, and those don’t tend to be great for oil prices in the longer term,” he said.
WTI crude, the U.S. benchmark, settled slightly higher on Friday, logging its best week since early February.
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