An improving global economy and stronger demand for higher risk assets helped drive crude oil futures higher this week. Although the market looked sluggish at times due to technically overbought conditions and uncertainty over the U.S. debt ceiling issue, the nearby futures contract has been able to hold on to most of its gains.
Typically, a rally lasts 7 to 10 weeks. We are now in the eleventh week since the bottom at $85.40. This makes the market vulnerable to a short-term correction. The best topping signal to watch for is a closing price reversal. This occurs after the market has had a prolonged move up in terms of price and time and closes lower after posting a new high for the week. All of these conditions have been met this week so a close below $96.04 on Friday could trigger the start of a decline next week.
On Thursday, January 24 the Energy Department’s Energy Information Administration said in its weekly report that crude oil supplies rose by 2.8 million barrels. This was higher than pre-report estimates and could be the catalyst that puts in the top and triggers the start of a much needed break.
Basically the fundamentals suggest the market should start to correct the eleven week rally. Speculators, on the other hand, buoyed by stronger demand for higher yielding assets and a bullish stock market continue to drive prices higher. Markets don’t go up forever and buying eventually dries up, but at this time there doesn’t appear to be any sign of a let up.
Technically, the main trend is up on the weekly chart. Based on the range of $102.53 to $85.40, a retracement zone was created at $93.97 to $95.99. At first this zone was a rally objective, but since momentum was strong, it was able to drive prices through the upper level of the target zone. Falling back into this zone will be a sign that the trend is weakening.
Traders should also note that the market is following an uptrending angle. This angle has been moving up at a rate of $1.00 per week since the bottom at $85.40. During the week-ending February 1, this angle comes in at $97.40.
At the same time, an angle from the $102.53 top has been dropping at a rate of $.25 per week. This angle is at $97.53 the week-ending February 1. Since the chart shows the angles crossing next week, $97.40 to $97.53 should be considered a target or resistance cluster. This is often the set-up that encourages long traders to take profits.
In summary, technicians often say that “a trend is motion is likely to remain in motion.” In other words, don’t try to pick a top as long as the market is trending. Current trading conditions suggest, however, that crude oil may be ripe for a correction triggered by profit-taking. If this occurs, then look for the start of a near-term correction. The move is not expected to be a trend changing event, but should reach a value area that could be attractive to traders with a long bias.