Technical Update: WTI; Reversing from a Double Top?

WTI has been on a clear uptrend since early December, when the price of the April 2013 contract experienced a low of $86.57 before beginning its upward march, increasing to a high of $98.65 on 30^th January. Now we’re seeing a pattern formation that could mean the end to this rally; a Double Top Reversal (a good explanation of this technical indicator can be found at stockcharts.com).

As the chart shows, the peak of $98.65 has been followed by a trough with a low of $95.37 on 11^th February, before rebounding back to the previous peak and touching $98.52 on 13^th. With the last four days exhibiting a downward movement back towards the trough resistance level, we could see confirmation of the Double Top Reversal, and thus of a downward trend, if the price falls through the $95.37 level.

To give a better indication of whether the Double Top Reversal is forming, we can look at some details of the underlying volume. One of the key points is trading volumes; the price increases seen as WTI approaches the second peak should be characterised by low volume, demonstrating a lack of market interest in a further rally, while the decline from the second peak should be characterised by higher volumes as bears begin to overwhelm the remaining bulls.

Indeed, as the volume indicators on the chart below shows, if we compare one-day volume with the 25-day MA, we see there was indeed a decline in trading on the second ascent. On the other hand, while volume did pick up slightly for the first major decline on Friday, trading on Monday and Tuesday was low due to the US holiday. Therefore to see if this really is a Double Top Reversal, we’ll have to wait for developments in a couple more sessions.

WTI Price Implications

If the reversal pattern is confirmed with a break below the $95.40 support level, a common price target would be the support level minus the difference between the peak and the support. Hence WTI may fall to around $92.30 in the coming days. Having said this, WTI has gained in US trading today, and if increasing volumes are seen in conjunction with these increases then it could be that the break in the upward trend is just temporary.