Here's where pros say oil will bottom (Ouch!)

Published Tue, Jan 6 20156:00 AM ESTUpdated Tue, Jan 6 201510:03 AM EST

Technical analysts (the guys and gals who focus just on charts to make buying and selling decisions) were watching the psychologically important $50 level in oil to be support. WTI crude was clinging to that price as Monday came to a close. If $50 doesn't hold however, there's a lot of room before the next support level is hit… Chart watchers are refreshing their FactSet and Bloomberg terminals and going back 15 and even 30-plus years in order to find where oil will go next. Many are concluding $40 is the next marker to watch. "If prior trends are an indication of where this trend will take us it seems as though the market will head straight for $40, which has been a major point of support/resistance over the last 15 years and may be again in this move," said Mike Harris, president of Campbell & Co. "Buying oil here seems like trying to catch a falling knife. Ouch!" As the chart above notes, $40 was around where oil found a bottom in the middle of the financial crisis in 2008. Before the energy superbull market, $40 was also a key level where oil kept topping out from 2000 to 2004. Harris may be one to listen to as his firm's bets against crude helped its Campbell Global Assets Fund post a 20 percent gain in 2014, trouncing other hedge funds. Read More As oil breaks $50, Wall Street getting more bearish Why do these levels still matter 15 years later? Well, using historical prices to gauge future supply and demand is what technical analysis is all about. And so the thinking goes that oil traders who successfully bought at $40 in 2004 and 2008 will try to do so once again. After all, it was a big winner for them on both occasions. The buying demand from them should come in and make $40 a bottom as oil continues to fall here, according to technical analysis theory. John Kosar of Asbury Research is going even farther back to find the bottom. He too, sees it at $40. "The monthly chart (above) shows that the next support for crude oil futures is $50.20 per barrel, which is currently being tested," said Kosar, in an email. "The next level is an additional 20 percent below the market at the $40.38 March 1994 benchmark low." What's more, technical analysts believe historical volume can be used to judge the relative strength of a particular level and that's particularly relevant at the $40 level once again. Huge volume accompanied the buying at the $40 level in 2008, according to MKM Partner's Jonathan Krinsky. He said in a note to clients: "Another way to view potential support is by looking at 'Volume at Price.' This shows the amount of volume traded at each given price level. The theory is that price moves slower through areas where there has been lots of volume traded, and quickly through areas with little volume traded. This suggests that there could be room all the way down to the 2009 lows in the high $30's." Investors and analysts believe there is a fundamental reason to conclude the bottom isn't until oil hits $40 as well. "Oil will go to $40 if only because several OPEC nations have expressed a willingness to suffer oil prices at $40," said Gina Sanchez of Chantico Global, which was spun out of Roubini Global Economics in 2012. "Moreover, it could stay there for a year, because that is what the Saudi's can afford in terms of budget deficits." Sanchez formed this opinion after a private meeting her firm had with a senior official from OPEC member the United Arab Emirates, she said. Read More Don't fret over oil's effects...yet: McNamee To be sure, some veteran oil traders and chart analysts contacted for this article were buying on Monday on the belief that maximum pain had been reached and the $50 level would hold. "This move was too far and too fast and also caused by bottom pickers getting burned and being force to bail out of their position causing a slinky going-down-the-stairs effect," said Greenberg Capital's David Greenberg, who started trading commodities in the pits 25 years ago. "The shorts will start taking profits, and there should be a stabilization of the market."