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…