Investing.com — Bank of America (BofA) issued a stark warning that the market is on the verge of a dramatic breakout in a July 28 note. After more than a year of trading within a tight range – a pattern technically known as a triangle – analysts think the market is ready for a sharp and sudden move.
The Bermuda Triangle analogy
BofA compares the current market to the Bermuda Triangle, where things are said to disappear without a trace. In this case, the disappearance could point to the possible evaporation of macro risk premiums, concerns about global demand or the hope of long-term supply constraints. These factors have been critical in keeping oil prices relatively stable.
A tight coil ready to spring
The brokerage’s technical analysis shows that the oil market has gone through a period of compression, similar to a tightly wound spring. This suggests that a violent release of energy – in the form of a significant price movement – is imminent.
Bearish bias
BofA’s primary outlook is bearish. The analysts believe that oil prices are likely to break out of the triangle pattern by the end of the year and fall to the range of $63.02 to $60 per barrel. A weekly close below $78 per barrel for Brent crude would reinforce this bearish view.
Bullish counter argument
However, the brokerage flagged the possibility of a bullish breakout. If oil prices can maintain levels above $77.18 per barrel and cross the $89 per barrel mark, this could mark a bullish reversal and potentially push prices towards $105 per barrel.
Long-term perspective
BofA maintains a secular bullish view on oil prices, with the recent period representing a cyclical bear market within a broader uptrend. Analysts believe that a drop to the $63.02 to $60.00 range would mark the end of this cyclical downturn.
