Louise Yamada, managing director of Louise Yamada Technical Advisors and one of the most respected technicians in the market, sees even lower prices ahead for crude oil based on the technicals.
West Texas Intermediate (WTI) crude oil contracts traded more or less in a range between $78.80 and $115 per barrel since late 2010, notes Yamada. Within that range, oil began an uptrend in the middle of 2012. But that uptrend was broken in August and she says oil prices are challenging the $78.80 critical support level.
"That's a four-year support," Yamada said. "A break of that level would really have a significant technical implication of lower prices to come for oil."
Yamada believes the four-year trading range has been serving as an extended top for oil prices since the 2009 lows. "The bigger the top, the bigger the drop," she said. "If we do see a break under that $78.80 level, then I think oil is going even lower. And the momentum – daily, weekly, and monthly – has been negative."
It's a similar story for Brent crude oil prices, which trade in London. However, Brent prices already broke below what Yamada sees as critical support at around the $100 level.
"This break of $100 suggested that the $90 level would come into question, but it has already broken that four-year support," Yamada said. "So it's a little bit ahead of the WTI in having made the technical breakdown suggesting lower levels."
While the ETF that tracks the energy sector (trading under the ticker symbol XLE) has recently had a bounce, there could also be bad news ahead for energy stocks as well, according to Yamada. "In late 2013, we had a relative strength breakdown under a six-year support," she explained. "That began to suggest to us that energy was moving into a structural decline. And that has continued to be in place."
Even though the XLE has seen a 7 percent bounce in the last week and a half, Yamada worries about its similarity to another sector that was in a similar situation a few years ago. And that didn't end well for investors.
"We're concerned about energy from a structural perspective," she said. "We saw a six-year breakdown in relative strength for financials in 2007 so you have a similar corresponding concern in terms of that size of a break."