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Is the Pullback in Crude Ending, or Just Starting?


May crude oil futures rallied from a low of 29.85 in January, to a March 18 peak of 42.49. Since then, oil has been pulling back. On April 5 it hit a low of 35.24, bounced slightly, and on April 7 is trading near 37. Following the rally, is this pullback likely over, or just starting? Here's the breakdown.

The January to March rally offset the last wave down that occurred in early January. That decline took the price from 41.35 down to the 29.85. Therefore, the rally was slightly larger than the decline. When that happens it often results in a larger move to the upside.  That doesn't mean the price will go to $80 right away. What it means is that there is about a 70% chance that this pullback will stay above 29.85, and then rally back above 42.49. The price doesn't always proceed higher based on this pattern though. About 3 out of 10 times it drops below prior low.

In terms of how far the price of crude could pullback, Fibonacci ratios can help. A 61.8% (approximate) pullback is common, and that occurs at 34.68. That aligns with potential support at 35, which is where the price broke above a sideways period in late February. Slightly less likely is a decline to the 32.50 region, which is about a 78% pullback of the rally. That level aligns with support from late January and February.

Figure 1. May Crude Daily Chart

If the pattern plays out--with the pullback stalling before reaching 29.85, and then rallying above 42.49--the expected targets are 46.50, followed by 50 (just below). These targets put the price is in a resistance area from September through November.

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