WTI oil: a correction to the downside soon?

FOR the past four months, West Texas Intermediate Crude (WTI) oil has made remarkable progress to the upside. Despite the recent rally, we believe there might be limited upside ahead as the confluence of 60-month moving average and 62.58 resistance area stands in the way.

As WTI oil tests the critical resistance area, a reversal lower is expected with the extremely concentrated long bets showing up on the Commitment of Traders (COT) non-commercial futures positions.

Notice how reactive WTI oil is to the 60-month moving average since June 2009 shown by the grey highlighted areas. There seemed to be a special relationship between them, making the 60-month moving average a crucial signal to watch. A general rule of thumb for the existing uptrend to remain intact is to have price staying above the 60-month moving average, vice versa. For example, after WTI oil price closed above the 60-month moving average (67.80) in June 2009, the uptrend was confirmed. The subsequent moves higher were all supported by the 60-month moving average shown by the grey highlighted areas even though there were some intra-month lows below the 60-month moving average.