On May 30, 2017, the crude oil (WTI) daily price chart triggered what market technicians call a moving average “death cross” event. This occurs when the shorter-term 50-day simple moving average (SMA) crosses below its longer-term 200-day average (Figure 1). However, based on historical data, this may indicate that the commodity is in its initial stages of stabilization and a bottoming process.
Some market participants believe that when the shorter-term SMA moves below the longer-term SMA a bearish trend will persist; but this may not always be true. In some cases, the price begins to stabilize and move higher shortly after the crossover takes place.
Looking at 32 years of historical data on the crude oil (WTI) daily chart, there were 23 instances when the 50-day SMA crosses below the 200-day SMA. Subsequent price returns tended to be flat to modestly lower for approximately three months before stabilizing and moving higher over the next six-to-nine months (Figure 2).
Figure 2. Data: 1985 – June, 2016
Often, a death cross event is the after effect of a bearish intermediate-term price trend and tends to be a lagging indicator of future market direction. Oil price patterns may have just triggered a death cross, but current market conditions and historical data suggest a period of price stabilization may be likely which could signal the beginning stages of a bottoming process.
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