Crude oil hovers near key technical zone as geopolitical uncertainty lingers

Crude oil traded lower on Tuesday as traders assessed the prospect of an end to tensions with Iran. During his 60 Minutes interview, President Trump indicated hesitancy about expanding the conflict. As Adam Button reported, the decline intensified after Al Hadath stated that Trump asked Iraq's prime minister to pass along proposals to Tehran and assist in mediating a resolution to the conflict. The news is removing some of the war risk premium from oil prices.

I examine what the decline meant for crude oil from a technical perspective. The price broke beneath three support levels within a range of just 24 cents. Where can sellers now rely on resistance to set their risk? What would buyers need to achieve to flip the drop into a false breakdown? I go through both possibilities on the chart.

The political situation is important. Republicans lost control of both chambers of Congress in the midterm elections, and the conflict along with higher gasoline prices contributed to the backlash. That provides the White House with added motivation to pursue a diplomatic path. For oil market participants, the key issue is whether these initiatives lead to developments concerning the Strait of Hormuz. Adam also pointed out that a Qatari official disputed a report that Iran had dropped its condition of controlling the strait and collecting transit fees. That explains why prices can shift rapidly in both directions as news breaks.

From a technical standpoint, the drop pushed crude oil below three thresholds.

• The 100-day moving average at $87.17.

• The 200-day moving average at $87.10.

• The 50% retracement of the rally from the July low at $86.93.

The $86.93 to $87.17 range serves as a gauge for both bulls and bears. The bears made the initial move by pushing prices below the entire cluster. Can they maintain that position? If a rebound stalls under $86.93 and the price reverses lower with strength, the previous support turns into resistance. That would give sellers greater conviction that there is potential for further declines.

Alternatively, if prices climb back into the zone, the bears' hold begins to weaken. Returning above $87.17 and staying there would make the drop appear as a failed breakdown. That could prompt some bears to exit their positions and provide buyers with room to push prices higher.

The lesson. When two moving averages and a retracement level cluster together, consider them as a zone. The initial move through the zone reveals who made the first push. The subsequent test provides more insight into who is in charge. In this case, $86.93 is the level where sellers can position themselves from below, while $87.17 is the threshold buyers need to recover and hold. That gives both sides a nearby level to define their risk while headlines continue to emerge.