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Watch This Level to Start a Pullback in Brent Crude

The 2016 rally in Brent crude (BZ) has taken the August contract from a low of 30.85 to a May 26 high of 50.95. The rally has taken the form of a slightly narrowing channel, or wedge. The rally indicates the long-term downtrend is over and higher prices will be seen over the longer-term, but a pullback from this rally is likely to occur before the rally extends much higher.

51 to 54 is a significant resistance area from 2015. In May the price showed a lot of hesitancy in the 50 region, moving sideways between May 16 and June 2 (so far). The price could continue to edge higher, but a deeper pullback is becoming increasingly likely. The recent 50.95 high was also right at the top of the trend channel/wedge, a place where (at least minor) pullbacks tend to originate.

Figure 1. August Brent Crude Futures - Daily Chart

Moving within the wedge is a possibility, indicating a short-term pullback to 47.60 to 46.60. A drop below 46.50/46.00 breaks the wedge and indicates the larger pullback is underway. If this is the first wave higher in a new uptrend--and it looks like it is--then the pullbacks that follow are typically 50% to 60% of the advance. That indicates Brent crude will likely pullback to about 41 to 38.50.

Those who are long right now should be cautious in the short-term, but a pullback to the 41 to 38.50 region will present a major buying opportunity for the next rally in the overall uptrend.

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