Despite the recent weakness in Nearby Crude Oil on the daily chart, the weekly and monthly charts are showing quite a bit of resiliency. Both of these charts suggest the market may be in a position to breakout to the upside which could be the reason why traders are coming in to support the market on short-term sell-offs.
Fundamentally, gains seem to be capped by high inventories, but the continuing improvement in the U.S. economy coupled with a spattering of geopolitical events have helped maintain a strong uptrend. The recent sell-off in crude oil from late June to mid-July was met with strong buying which has the market poised to begin August within striking distance of a breakout to the upside.
Technically, crude oil has been trading inside a powerful triangle chart pattern with a strong upside bias. This chart pattern tends to indicate impending volatility. Since bottoming in January 2014 at $87.26 the market had produced five consecutive months of higher-highs until it reached a level of $107.50 in June. At that time it traded to the bullish side of the triangle, but the volume wasn’t there to support a breakout.
If you recall, that breakout rally was fueled by geopolitical events in Iraq, but the high supply and the easing of tensions made the high price attractive to hedgers, leading to a corrective break in July. This month, buyers came in to support the market on a pull-back into a pair of 50% support levels at $98.85 to $97.38. The subsequent rally put the market back in contention for further upside action.
On the weekly chart, the zig-zagging higher-bottom, higher-top chart pattern clearly shows investors are buying crude oil on the breaks with speculators buying the breakouts. As long as the investors continue to support the market in this manner, the uptrend should continue, but it is going to take another geopolitical event to draw the attention of the speculators to take this market through the top.
After making a top in late June at $106.64 and breaking almost $8.00, buyers came in to support September Crude Oil futures to produce a fast retracement into $102.66 to $103.60. Selling came in as expected, but the break has not been severe enough to rule out another strong attempt to make a new high for the year.
With the market finding resistance at $102.66 to $103.60, there is going to have to be some kind of geopolitical event to bring in the speculators who have the buying power to drive the market higher. The high supply is working as a deterrent against the rally so outside influences will be necessary to trigger the next bullish move.
The recent sell-off on the daily chart from $106.64 has painted a bearish picture on the daily chart. After reaching an oversold level at $98.68, investors went on a buying spree fueled by a greater than expected drawdown in inventory. This move triggered a rally back to a resistance zone at $102.68 to $103.62 where seller came in again.
Now that a short-term range has formed between $98.68 and $103.45, a new retracement zone has formed at $101.07 to $100.50. This is the critical zone to watch this week. If buyers come in on a pullback into this zone, watch for the start of another leg up which will put the daily chart back in sync with the bullish weekly and monthly charts.
Despite the historically high crude oil supply, traders have come in to support the market on the breaks this year while the speculators have helped trigger a few breakouts. Currently, crude oil is experiencing one of its breaks. This break may be setting up a buying opportunity for value-seekers who watch price and those who believe the recovery in the U.S. economy will help increase demand.
The wildcard is the geopolitical events. At this time, investors have a lot to deal with from the crisis in Ukraine to the fighting in Gaza. Additionally, the situations in Syria, Iraq and Libya are all being monitored closely for their potential effect on supply. The uncertainty over additional sanctions against Russia may keeping crude oil in a holding pattern, but this could change if investors get some clarity.
This week, crude oil investors should focus on trader reaction to a test of $101.07 to $100.50. This is the best support zone. How traders react to this zone should set the tone for August.