Crude Oil Price Forecast: Rebounds After Testing Long-Term Channel Support

Crude oil completed a $25.53 or 31.6% decline from the most recent swing high of $80.76 on Wednesday, with a low of $55.23. That price level was a successful test of support at the lower line of a long-term descending parallel trend channel. Given the subsequent bullish reaction following the low it seems that the market recognized the price represented by the lower channel line. The subsequent intraday rally surpassed the 38.2% Fibonacci retracement of the internal downswing and got halfway to the 50% retracement at $63.86 on Thursday, today, and established a higher daily high of $63.45 and higher daily low of $58.86.

Volatility Likely to Continue

Given the significant increase in volatility seen since the start of the one-day bearish reversal last Thursday, volatility may continue for a while longer as the market digests the implications. Further tests of recent lows as support, if it occurs, should begin to provide some indication of what might come next. However, in general, since the lower end of the channel was reached, followed by a sharp bullish reversal and after a significant decline, it seems likely that a bottom, or close to a bottom has been established.

Additional Declines to Test Support Remains a Risk

Nonetheless, since the lower channel line is falling, additional tests of the line as support could occur below the $55.23 low. Therefore, a drop below that low may not see the same response as a continuation signal that occurs earlier in a trend. There is also potential support a little below Wednesday’s low at $55.00. That is the 127.2% (square root of 161.8%) extension of the bearish retracement starting from the 2023 peak of $95.50.

Largest Decline Since 2023

The current correction was the largest on a percentage basis since May 2023. It surpassed the two prior corrections that saw declines in the price of crude oil of 25.3% and 29%. Since the correction occurred along with a breakdown below long-term support and reached a 50-month low, it adds to a bearish thesis. However, that could take some time to play out and, in the meantime, it favors rallies to test prior support levels as resistance, or consolidation. A weekly closing price below the prior long-term support of $62.07 would further confirm a long-term breakdown on the weekly time frame.

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