Crude oil plays a significant role in the global economy despite the continued efforts to reduce its use and to find sustainable eco-friendly alternatives. From a historical perspective, in the equity and commodity trading, market analysts have studied the occurrence of various cyclical patterns that appear on an average over 29-year (+-) period. Since the beginning of oil’s rise in the early 1900s, as a commodity high-in-demand, major peaks in the benchmark index have occurred largely in 1920, 1958, and 1980. Oil peaked with the commodities index in both 1920 and 1980.
Unlike most other products, oil prices are not determined entirely by supply, demand, and market sentiment toward the physical product. Rather, a strong component of the market is influenced by oil futures contract that are traded greatly among speculators who have since last many years played a major role in price determination. Regardless, of how the price is ultimately determined, it appears that oil will continue to be in high demand for the foreseeable future.
What is A Golden Cross?
The “Golden Cross” is a technical chart pattern indicator that depicts a relatively short-term moving average (50-day) of an asset rising above a long-term movie average (200-day). It is an indication of a bullish scenario and high trading volumes forming from a crossover that involve security’s short-term moving average breaking over its long-term average.
Investors looking to buy a security will at times enter the market when the price is rising above the 200-day moving average rather than wait for the 50-day moving average to make the crossover. This is typically due to plausibility of Golden Cross being an indicator that may not occur until market has already turned from bearish to bullish trading sentiments. For short-traders the technical of Golden Cross can provide an indication that bear market is over and they may be required to revisit their position. More experienced traders employ it in tandem with other complimentary technical indicators such as Average Directional Index (ADX) or Relative Strength Index (RSI). The latter are momentum indicators that can address some of the relative lagging of the former in price determination.
WTI Crude Oil Market: Technical Analysis
West Texas Intermediate (WTI) crude, the North American oil benchmark, is likely to witness a price increase, as a lagging indicator is about to turn bullish for the first time since December 2019. The 50-day simple moving average (SMA) of prices has almost crossed above the 200-day SMA. The resulting golden cross, a long-term bull market indicator, would be the first in nine months. Matt Maley, a market strategist at Miller Tabak stated that crude oil has seen the golden cross on weekly chart only three times since the beginning of the century and that in the previous occurrences it resulted in price jumping between 20 percent to 50 percent.
The indicator, however, is based on backward-looking moving averages and tends to lag prices and often traps buyers on the wrong side of the market. In other words, the golden cross, and long-term SMA crossovers in general, work best as contrary indicators, marking interim tops and bottoms. On the other side, on the WTI technical chart there seem to be a hammer candle that is indicative of a bearish market which can resist any price increase or can even cause a price drop.
Conclusion
The energy sector has outperformed the overall market by a large margin since last October. Despite lingering concerns about the Delta Covid variant, major investment banks continue to have a bullish market outlook for crude oil. Goldman Sachs adds to the bullish forecasts expecting Brent Crude, major benchmark of Europe’s North Sea oil production, at $80 a barrel at the end of this year. “Looking beyond the Delta headwind, we expect the demand recovery to continue alongside rising vaccination rates,” Goldman Sachs said in a note in the middle of August.
The development of “golden cross” raises the confidence of the investors, as a telling indicator that does not happen often, but when it does the markets historically “buzz”. As long-term indicators carry more weight, a golden cross scenario suggests that a bull market could be on the horizon. This is usually reinforced by high trading volumes which means crude stocks could be about to boom.
