Crude oil unwind hits a hurdle

• Hormuz optimism continues to pressure crude prices
• Repeated 200DMA tests fail to deliver breakdown
• Stretch indicators warn squeeze risk remains

Good news keeps coming

Bears have had it all their own way in crude recently. An improving outlook for relations between the United States and Iran has helped fuel an abrupt unwind in prices, encouraging traders to contemplate a return to levels seen before the war erupted.

But after such a sharp decline, it's worth remembering we've seen plenty of false dawns during this conflict. Periods of optimism have repeatedly been followed by renewed escalation, and while everything appears fantastic right now, history and commonsense suggests another setback can't be ruled out.

Given how extended the move has become, any development that derails hopes for a lasting agreement could easily spark a squeeze. That's why I'm watching the 200-day moving average closely in the near term.

200DMA the line in the sand

Source: TradingView

Crude continues to gravitate towards it, acting like a magnet as optimism surrounding the peace process builds. However, it's been tested repeatedly in recent sessions, but none of the breaks have stuck, reinforcing its importance as the downside level to watch.

For bears looking for an extension of the downside move, it's not enough to see crude probe beneath the 200-day moving average; they need to see one of those breaks stick, preferably accompanied by a close beneath the recent low near $76 a barrel. If that were to occur, attention would likely shift towards $73.55, where crude settled on the Friday before fighting erupted in late February.

Should the gap be filled, $70 a barrel becomes an obvious downside target, having repeatedly acted as both support and resistance over the past year. Below there, $66 warrants attention, having capped rallies and provided support on multiple occasions earlier this year.

Given the selloff has been driven by the removal of geopolitical risk premium, a return to those levels would suggest the market believes the impact on supply has been neutralised, which comes across as optimistic given ongoing downstream supply disruptions and need to replenish strategic reserves. 

From a momentum perspective, the oscillators continue to favour downside. RSI (14) is trending lower and sits near 30, while MACD remains in negative territory below its signal line. The one note of caution is how rapid crude's unwind has become, with the ATR stretch indicator in blue sitting at levels not seen since the start of the pandemic in early 2020.