A hidden 'triple top' in oil price charts suggests the rally has run out of gas

By Tomi Kilgore

The failure of a key momentum indicator to match the price highs suggests buyers may have run out of steam

The rally in crude oil prices may have run out of steam, based on the behavior of a technical momentum indicator that can track subtle changes in price behavior.

On Wall Street, what something can't do can be more telling than what it can do, especially around potential price tops.

Brent crude futures (BRN00), the global benchmark, have been steadily climbing over the past few months, approaching the highs that came after the start of the U.S.-Iran war, amid worries that the conflict will escalate. But at the same time, a widely followed underlying momentum indicator - the Relative Strength Index - has been unable to match the price gains, which suggests the rally may be running out of steam.

For Brent crude, RSI has produced what chart watchers refer to as a triple-top pattern, in which the third attempt at a breakout to new highs failed to be the charm. That is viewed as warning of a reversal in trend. And as prices have pulled back from Friday's peak, RSI has fallen even faster, a sign that sellers now have momentum on their side.

On Tuesday, Brent futures settled down 1.7% at $113.88 a barrel and have lost 2.4% since closing at a six-month high of $116.72 on Friday.

But keep in mind that signals generated by RSI behavior are more warnings than actual buy or sell signals. The current RSI signal warns not to buy on this week's dip, but the signal to sell has to come from a breakdown in price, which hasn't happened yet. At the very least, RSI is saying there's no reason to rush to buy at current levels.

Classic triple top, with a twist

While the chart below seems to show that RSI has formed a classic triple-top reversal, there are nuances that may need clarification.

As prices spiked higher in mid-July, RSI rose with them and peaked at fourth-month high of 75.54 on July 23. RSI readings above 70 are believed to depict overbought conditions, which is a technical term that suggests buyers need some time to digest what they just accomplished.

The second high in RSI is a little bit higher than the first peak, at 76.35, even as prices were quite a bit higher. There's hardly a noticeable difference, however, as RSI's peak was reached on Sept. 10, while a second rally attempt stopped a little lower at 73.01 on Sept. 15. Meanwhile, the Sept. 15 settlement in price of $108.75 a barrel was 1% higher than that of Sept. 10, according to Dow Jones Market Data.

That mini-divergence between price and RSI warned that upward momentum was fading, and that was confirmed as prices pulled back.

After the uptrend resumed, the price reached on Oct. 23 was about 16% above the Sept. 15 high, but RSI peaked at 74.61, which was even below the July 23 high. RSI making a lower high even though prices made a much higher high is the market's tell that momentum has swung to the side of the seller.

Price needs to confirm RSI's message

Considering how strong the price gains have appeared, and given that they are backed by actual supply constraints, it may seem premature to say sellers appear to have assumed control. But RSI can detect subtle changes in behavior that may not be so apparent when just watching price movements.

Again, the RSI signals are warnings that need to be confirmed by price to indicate the uptrend has reversed.

First, the price needs to fall below the trendline that has defined the rally off the early July low. The line extends to about $104.40 on Tuesday, according to FactSet data, which is 4.6% below current price levels. The line is rising at pace of just under 30 cents a day. Falling below that line would the first price sign that the trend has changed.

The next level to watch is the Sept. 29 close of $96.16. Falling below that would make a lower low, the first half of the trading pattern - lower lows and lower highs - that defines a downtrend. A subsequent bounce that fails to make it back to the Oct. 23 high of $116.72 would seal the deal.

Also of note would be that if RSI falls below the Sept. 29 print of 46.60, it would complete the lower-low and lower-high pattern.

To wipe away the negative behaviors, prices would need to make a fresh high above $116.72. How RSI is acting at that time would also matter.

-Tomi Kilgore

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

10-27-26 1524ET