Last week it was mentioned that nearby crude oil was expected to complete a test of the retracement zone at $92.37 to $90.85 and likely stay in this zone until the fundamental traders could reassess the economic conditions. After initially testing the 50% level at $92.37, the market fell further into the zone to $91.92 before establishing short-term support on the daily chart.
Despite the sharp sell-off from $98.79, the main trend is up. Since the break from the top is holding inside the retracement zone, one has to conclude that crude oil is in a corrective mode. Typically, this type of break is triggered by uncertainty. Bullish traders tend to lose their focus and begin to search for excuses to pare positions. This usually means a short-term break into more attractive price levels.
Some of the fundamental reasons for the recent weakness are commercial hedging pressure, a sluggish economy, and lower demand for higher risk assets. One clue that the market was nearing a top was a shift to the short-side of the market by commercial traders according to the Commitment of Traders Report. This was followed by speculation that the economy was at a standstill because of persistent rumors about flat gross domestic production. Finally, turmoil in the Euro Zone and talk of ending the Fed’s bond-buying program drove investors into the safety of the U.S. Dollar.
All three of these factors were relevant to the weakness exhibited in the crude oil futures market…