Brent crude oil traded lower after it hit resistance slightly below 42.50, a barrier marked by the peak of October 6th. Overall, the price looks to be forming a “head and shoulders” formation, with the neckline being at around 41.14. Although the formation is bearish, we would prefer to wait for its completion first, before getting confident on larger declines. For now, we will stand pat.
If the bears are able to push Brent below 41.14 and complete the H&S pattern, we could see them initially targeting the 40.40 zone, defined as a support by the lows of September 29th and 30th. They may decide to take a break after hitting that level, thereby allowing a small bounce. Nonetheless, if the bounce stays limited near the neckline, another round of selling could be possible. The 40.40 hurdle could get broken this time around, something that could set the stage for extensions towards the low of October 1st, at 39.50.
Shifting attention to our short-term oscillators, we see that the RSI has turned down and now runs close to 50, while the MACD lies near both its zero and trigger lines, pointing sideways. All this suggests a lack of directional momentum and enhances our choice to stay sidelined until the H&S is completed.
In order to start examining the bullish case, we would like to see a clear break above the head, at around 43.30, or even better, above the 43.65 level, which is marked as a resistance by the peak of September 18th. This may encourage the bulls to push towards the high of September 4th, at 44.20, the break of which may extend the advance towards the inside swing low of August 31st, at 44.80.
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