An Unsavory Reality Check for Crude Bulls

It's hard to imagine a more clearly phrased clarion call for contrarian traders than the one made by an April 20 Bloomberg headline: "Goldman Says Ignore the Technical, Savor the Fundamental on Oil." But a closer read of the Goldman Sachs research note in question unearths a suggestion that traders might also want to go ahead and overlook the fundamentals, given the firm's view that gasoline demand "is probably being understated," per Bloomberg.

After considering the below chart, which tracks prices for Nymex-traded West Texas Intermediate (WTI) crude oil, we'd tend to agree that a bullish view on oil is more or less entirely dependent upon one's willingness to ignore the technicals. Currently, crude is threatening to break below an ascending trendline connecting most of its higher lows since last summer, while the May high occurred at the site of a descending trendline connecting previous peaks from February and April.

There's deeper significance to that May top than a freshly completed series of lower highs, too. Back on Nov. 30, when OPEC initially revealed its plans to curb output, oil prices topped out just below $50 per barrel -- and on May 25, the day before OPEC affirmed it would extend those production cuts, oil peaked within pennies of $50 just prior to its ensuing "sell the news" decline.

At its current levels, oil is treading in precarious territory. Not only is that ascending trendline of higher lows at risk, but crude is also trading just above its 320-day moving average (in pink on the chart below; this trendline contained the November low before providing support at the early May bottom). And nearby are a couple of key "round percentage return" price points; namely, $47.41 marks a 20% gain from the 52-week low, and the $49 level is 10% below the annual closing high.

An inability by oil to hold these chart levels in the short term would certainly be an indicator of more downside to come -- but for those who choose to "ignore the technicals," there's separate cause for concern from the weekly Commitments of Traders (CoT) reports, which have recently shown large speculators unwinding a 10-year high in net long positions on crude. Any confirmation of oil's recent technical weakness could prompt more selling from this group -- a fundamental development that would be unsavory, to say the least, for oil bulls.