US oil prices tentatively formed a bearish butterfly pattern after reaching my upside target of $58.25 from my April 15th post. The recent gains for oil prices have been contributed to the growing concern that supply disruptions may occur in the Middle East region as Saudi Arabia steps up its military efforts in Yemen.
The oil daily chart shows that since closing above the 100-day SMA, price has continued this current strong rebound and partial recovery after a major collapse that saw crude lose over 60% of its value from the 2014 high of 107.68. The recent 5-week rally however appears poised for a retreat as price may have formed a bearish butterfly pattern. Point D is tentatively confirmed by the 200.0% Fibonacci expansion level on both the X to A and B to C legs.
If we do see oil prices slump here, we could see price target the $54.50 region. Only a daily close below both the 50- and 100-day SMA will support a stronger bearish bias in the short-term.
To the upside, the psychological $60.00 level will provide major resistance. A weekly close above that level could sway market consensus calling for a further advance.
The trade: Sell oil at $57.15, with a stop loss at $58.15 and take profit at $55.15. The risk/reward ratio is 1:2
Edward J. Moya
Senior Market Strategist