Yesterday I highlighted $42.70-43.20 as being a key area that may offer some important insight into sentiment at a level that was well supported over the last couple of months (WTI Crude – Will the September Floor Hold Again).
As we approached the level, there was only marginal signs that momentum was easing and today we’ve seen this support level broken which may suggest we’re heading back towards August’s lows. At the same time, both the stochastic and MACD are showing signs of downward momentum growing again, not easing off.
That said, since the level was broken we have seen an almost immediate reversal and it is back trading in the zone that has previously been considered support.
This may suggest that the initial break lower was a false breakout and we’ll have to wait and see whether either further attempts will follow or the lower bound does remain intact.
Alternatively, we may just be seeing a small retracement and the area that previously offered support is now providing resistance. This would only be short-term confirmation though and we could see traders seek further confirmation in the days or weeks ahead.
A daily close would appear to confirm the break of this support which in turn would suggest further declines may follow in the coming weeks. Given that this level was established as the new lower bound shortly after it hit a six and a half year low back in August, a break would suggest to me that WTI could be headed back there again.
It should be noted that the release of the FOMC statement and rate decision by the Federal Reserve is expected to trigger higher volatility in the US dollar. Depending on the final outcome this could have an impact on all commodities as they are priced in dollars. A stronger dollar is generally believed to be bearish for commodities while a weaker dollar is considered to be bullish.