June crude oil futures traded mixed last week as traders had to deal with conflicting signals. Technically, the market is oversold on a short-term basis which gives it a slight upside bias. In addition, a weaker U.S. Dollar is making it cheaper for foreign buyers. Increased demand for higher-yielding assets is also helping to underpin prices.
On the downside, however, is the thought that the pace of U.S. economic recovery is weakening. The recent lower-than-expected jobs data indicated an economy filled with uncertainty as business aren’t hiring at a rate necessary for the Fed to lift its asset-purchasing program. Furthermore, huge supply and low demand are still major issues. The International Energy Agency recently cut its global demand forecast for 2013 for the third consecutive month. The agency also predicted the weakest demand for Europe since the 1980’s.
In addition to the EIA forecast, the Organization for the Petroleum Exporting Countries (OPEC) also cut its global demand estimate for the second time in two months last Wednesday. Last week, U.S. crude oil inventories increased by 0.3 million barrels to hit 388.9 million. These reports are all indicating that the fundamentals are not supporting a global economic recovery and that pressure is likely to remain on crude oil prices.
Taking a look at the weekly June crude oil futures contract chart, we see that the market is straddling a major 50% balance level. Based on the top at $107.86 the week-ending March 23, 2012 and the bottom at $81.46 the week-ending June 22, 2012, a major 50% price has formed at $94.66. This price is controlling the strength and direction of the market and should have a major influence on price movement in the near future.
The market is also trading inside of a major triangle chart pattern. So far this emerging market hasn’t dictated direction. The fact that the market is on the weak side of the 50% level at $94.66 suggests that June crude oil could challenge the lower level of the triangle at $91.66 this week. On the upside, the resistance line is at $98.05.
According to the theory of technical analysis, the triangle chart pattern is categorized as a non-trending pattern. The gradual narrowing of the support and resistance lines compresses prices to the point where investors become frustrated, leading to a volatile breakout. Although the apex of the triangle will be reached the week-ending August 2, the market can make its breakout move at any time which is why investors should start to pay attention to the support and resistance points each week.
History of this pattern has shown that once a move begins, it could last for several weeks before reaching a top or bottom. The key to the move is whether the major trend traders jump on the market and force it in a particular direction. Often, a major fundamental event takes place to drive the market through the triangle.
In summary, investors should watch for choppy, two-sided trading action on the 50% price level at $94.66. Once the market begins to pull away from this level, a bias will grow, leading to an attempt to trigger a breakout. This is where the volatility is expected to come in. So at this time, we may be looking at failed rallies and breaks until there is major news to fuel a breakout in either direction. Since June crude oil is currently on the bearish side of $94.66, the bias is to the downside.