Crude oil and natural gas futures posted volatile moves this week that may be setting up another sharp rise to the upside, or a corrective move to the downside. Both markets have potential to rally further even after huge rallies, but since the moves are highly speculative, traders may be expressing a little caution about playing the upside in both markets at current price levels.
The natural gas story is bullish because of expectations of a cold winter after the summer heat trimmed the excess supply. Crude oil is bullish because OPEC is working on a plan to limit output in the face of a huge global supply glut.
The stories behind the current speculative moves are bullish, but may not be proven until well into the future - late November for crude oil and late December for natural gas. So the current rallies may be indicting that price is too far ahead of time. If this is a valid conclusion then we may see a pullback over the near-term into value zones. In this article, I've identified the pattern and price levels driving these markets this week and the next.
Weekly December Oil
(Click to enlarge)
The main trend is up according to the Weekly December Crude Oil chart. The change in trend occurred last week when buyers took out the previous top at $50.59.
Despite the strong upside momentum in October, this week's price action suggests the rally may be stalling. The first sign of weakness will be a break back below the previous top at…
Crude oil and natural gas futures posted volatile moves this week that may be setting up another sharp rise to the upside, or a corrective move to the downside. Both markets have potential to rally further even after huge rallies, but since the moves are highly speculative, traders may be expressing a little caution about playing the upside in both markets at current price levels.
The natural gas story is bullish because of expectations of a cold winter after the summer heat trimmed the excess supply. Crude oil is bullish because OPEC is working on a plan to limit output in the face of a huge global supply glut.
The stories behind the current speculative moves are bullish, but may not be proven until well into the future - late November for crude oil and late December for natural gas. So the current rallies may be indicting that price is too far ahead of time. If this is a valid conclusion then we may see a pullback over the near-term into value zones. In this article, I've identified the pattern and price levels driving these markets this week and the next.
Weekly December Oil
(Click to enlarge)
The main trend is up according to the Weekly December Crude Oil chart. The change in trend occurred last week when buyers took out the previous top at $50.59.
Despite the strong upside momentum in October, this week's price action suggests the rally may be stalling. The first sign of weakness will be a break back below the previous top at $50.59. This would indicate that the surge into $52.16 was fueled by short-covering or buy stops rather than fresh buying. In a strong rally, buyers tend to come in to defend the previous top.
The most important sign of a short-term top will be a close below last week's close at $50.38. This would form a potentially bearish closing price reversal top. If confirmed next week, we could see a 2 to 3 week correction into a retracement zone at $47.97 to $46.97.
A move back into this zone will have to be watched closely. In order to remain bullish, buyers would have to come in on a pullback into this zone. Since the trend is up, the buyers will be looking for value. They will be trying to defend the uptrend.
Sellers are going to try to take out this zone because they want to generate enough downside momentum to make $52.16 a new main top and secondary lower top.
Based on the current price at $50.85, the key number to watch at the end of this week is $50.38. A close below this price could set up the market for a sharp break next week.
Weekly December Natural Gas
(Click to enlarge)
The main trend is according to the weekly swing chart and the upside momentum is up. This could trigger a continuation of the rally next week. The trend will turn down on a trade under $3.112.
Now that the market has taken out the previous tops at $3.470, $3.429 and $3.440 with conviction, buyers are going to have to defend this area on pullbacks to serve as a sign that the buying pressure is building.
The main range is $4.535 to $2.370. Its retracement zone is $3.453 to $3.708. The intermediate range is $4.315 to $2.370. Its retracement zone is $3.346 to $3.576. The two zones overlap and the market is currently testing the area. Because of this, we could see a labored rally unless the market breaks out to the upside over $3.708, or breaks down under $3.346.
If the market stays inside $3.346 to $3.708 then a choppy, two-sided trade may develop.
Weekly December Unleaded Gasoline
(Click to enlarge)
The main trend is up according to the weekly swing chart. Momentum is also up, but the market is in the window of time to form a potentially bearish closing price reversal top. A close below $1.4707 on October 14 will create this chart pattern.
If the pattern forms and there is a confirmation next week, we could see the start of a 2 to 3 week correction into a key support zone.
The main range is $1.8360 to $0.9715. Its retracement zone at $1.4038 to $1.5058 is currently being tested. Trader reaction to this zone will determine the longer-term direction of the market.
A sustained move over $1.5058 will indicate the buying is getting stronger while a similar move through $1.4038 will signal the return of strong selling pressure. Holding inside $1.4038 to $1.5058 will indicate trader uncertainty. This could lead to a choppy, two-sided trade, however, it will also indicate impending volatility.
If a short-term range forms between $1.1800 and $1.5036 and there are signs of a top then the short-term retracement zone at $1.3418 to $1.3036 will become the primary downside target.
Based on the current price at $1.4767, the direction of the market next week will be determined by trader reaction to the Fibonacci level at $1.5058. The market is either going to take out this price and continue the surge to the upside, or sellers are going to come in and stop the rally, leading to the start of a possible steep break to the downside.
Conclusion
At this time, crude oil, gasoline and natural gas are moving higher. Crude and gasoline appear to be forming a short-term top while natural gas may be starting a prolonged rally.
Fundamentally, crude oil is being controlled by a possible plan by OPEC to curb production and the supply glut in the U.S. natural gas is being controlled by speculators banking on a cold winter.
Technically, each market is trading at or near key areas that could determine the direction over the near-term. The question that each market is likely to answer this week is whether bullish traders are willing to continue to buy at current prices given the recent volatile rally, or are they willing to forego the upside in return for a shot at more favorable prices.
