June crude oil surged on the daily and weekly charts, regaining a key support line and setting up the market for further upside action. Before getting too excited, however, keep in mind that the main trend is still down on the weekly chart and will remain in a downtrend until the swing top at $98.06 is taken out with conviction.
One week after taking out the support line of a triangle chart pattern, June crude is trading back inside the triangle, suggesting uncertainty amongst traders. This uncertainty may be being caused by conflicting fundamentals. For several weeks, the market had been attracting selling pressure because of perceptions of a weakening U.S. economy. Bearish traders had been envisioning an increase in supply because of a drop in demand, however, this week's action suggests otherwise.
Not only did the market rally on a stronger dollar, but the news that U.S. gasoline inventories posted a sharp drop actually helped crude oil post its biggest gain of the year on April 25. The 2.5% rise represented short-covering and new buying as traders speculated the drop in gasoline inventories would lead to increased demand during the spring-summer driving season.
The idea that short-covering may be triggering the rally is being supported by the Commitment of Traders report from April 16. This report showed that small speculators decreased long positions by 8,999 contracts while increasing short positions by 5,579. As of the report date, 362,228 contracts…
June crude oil surged on the daily and weekly charts, regaining a key support line and setting up the market for further upside action. Before getting too excited, however, keep in mind that the main trend is still down on the weekly chart and will remain in a downtrend until the swing top at $98.06 is taken out with conviction.
One week after taking out the support line of a triangle chart pattern, June crude is trading back inside the triangle, suggesting uncertainty amongst traders. This uncertainty may be being caused by conflicting fundamentals. For several weeks, the market had been attracting selling pressure because of perceptions of a weakening U.S. economy. Bearish traders had been envisioning an increase in supply because of a drop in demand, however, this week's action suggests otherwise.
Not only did the market rally on a stronger dollar, but the news that U.S. gasoline inventories posted a sharp drop actually helped crude oil post its biggest gain of the year on April 25. The 2.5% rise represented short-covering and new buying as traders speculated the drop in gasoline inventories would lead to increased demand during the spring-summer driving season.
The idea that short-covering may be triggering the rally is being supported by the Commitment of Traders report from April 16. This report showed that small speculators decreased long positions by 8,999 contracts while increasing short positions by 5,579. As of the report date, 362,228 contracts were on the short side of the spectrum.
The number of long commercial traders jumped by 21,933 contracts while the number of short contracts rose by 2,161. The total number of short commercial positions was 1,312,279 versus 1,062,449 long contracts. This week's rally suggests that commercial traders were anticipating a rise because of the increase in long positions. The fundamental news this week may have caught short commercial traders by surprise. We'll find out if this happened when the next report is issued at the end of the month.
Click to enlarge.
Technically, the main trend is down on the weekly chart. As of April 25, the market was testing a retracement zone at $91.98 to $93.41. So far this indicates that crude oil is making a correction in a bear market. Sustaining a rally above this zone will put the market in a position to rally higher but the rally may become labored since major resistance comes in at $94.66.
Before crude oil changes the main trend to up it will have to establish a support base. This analysis suggests that the market may have to retrace the current rally at least one time and test the recent bottom at $85.90. News that the economy is strengthening could underpin the market this week, but a weak global economy could send it back down again. Because of these unknowns, I have to maintain by downside bias.
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