The fundamentals have been light this week, but prices have been active. This is because of the increased volatility in other financial markets, specifically the stock market and the U.S. Dollar.
Fundamentally, U.S. inventories continue to fall, but output continues to rise. As far as OPEC is concerned, there are signs that its plan to limit production and trim the global supply appears to be working. However, buyers are skeptical about its long-term success.
Besides the traditional fundamentals, it is suggested that you start to watch other markets because they may have an impact on the price action. Especially important is the U.S. Dollar and the stock market. Wild swings in the dollar could have an effect on demand for crude oil since the market is a dollar-denominated asset.
A major sell-off in the stock market could also have an effect on crude prices if it leads to margin calls. Hedge funds may be forced to choose between exiting stock positions and raising cash to meet their market calls. This may force them to sell their positions in crude oil to raise the money. Crude oil investors need to be aware of this.
Crude Oil
Weekly October West Texas Intermediate Crude Oil Technical Analysis
(Click to enlarge)
The main trend is down according to the weekly swing chart. The series of lower-tops and lower-bottoms confirm this conclusion. The trend is doing to remain down until buyers are able to generate enough upside momentum…
The fundamentals have been light this week, but prices have been active. This is because of the increased volatility in other financial markets, specifically the stock market and the U.S. Dollar.
Fundamentally, U.S. inventories continue to fall, but output continues to rise. As far as OPEC is concerned, there are signs that its plan to limit production and trim the global supply appears to be working. However, buyers are skeptical about its long-term success.
Besides the traditional fundamentals, it is suggested that you start to watch other markets because they may have an impact on the price action. Especially important is the U.S. Dollar and the stock market. Wild swings in the dollar could have an effect on demand for crude oil since the market is a dollar-denominated asset.
A major sell-off in the stock market could also have an effect on crude prices if it leads to margin calls. Hedge funds may be forced to choose between exiting stock positions and raising cash to meet their market calls. This may force them to sell their positions in crude oil to raise the money. Crude oil investors need to be aware of this.
Crude Oil
Weekly October West Texas Intermediate Crude Oil Technical Analysis
(Click to enlarge)
The main trend is down according to the weekly swing chart. The series of lower-tops and lower-bottoms confirm this conclusion. The trend is doing to remain down until buyers are able to generate enough upside momentum to take out a swing top.
The current chart shows that the trend will change to up on a trade through $50.51. A trade through $42.52 will reaffirm the downtrend.
The 2017 range is $58.34 to $42.52. Its retracement zone is $50.43 to $52.29. Two weeks ago the market rallied to $50.51, testing this retracement zone. Sellers stopped the move, buyers took profits and now prices are retreating.
The short-term range is $42.52 to $50.51. Its retracement zone at $46.52 to $45.57 is the primary downside target.
This zone is most important to the near-term structure of the market and likely an area of keen interest for buyers and sellers.
Aggressive, counter-trend buyers are likely to show up on a test of $46.52 to $45.57. They are going to try to form a potentially bullish secondary higher bottom. This is usually the first step before a change in trend.
If enough buyers come in to stop the price slide and frighten the short-sellers enough to cover their positions then we could see a near-term test of $50.51. Taking out this level will change the main trend to up. Overcoming the 50% level at $50.43 will indicate the buying is getting stronger and taking out the Fibonacci level at $52.20 will indicate a serious shift in the momentum.
Short-sellers are going to try to drive prices through the $45.52 to $45.57 retracement zone. If successful, this price action would solidify the main top at $50.51 and the importance of the $50.43 to $52.29 retracement zone. It should also create enough downside momentum to eventually challenge a move into the last main bottom at $42.52.
Given the current price at $47.43, it’s safe to say that the near-term direction of October WTI Crude Oil will be determined by trader reaction to the short-term retracement zone.
Weekly November Brent Crude Oil Technical Analysis
(Click to enlarge)
The weekly November Brent Crude Oil chart is showing a similar chart pattern as the WTI futures contract.
The main trend is down according to the weekly chart. Its primary resistance zone comes in at $52.12 to $53.74. Its recent top stopped near the top of the zone. After failing at the Fibonacci level, the market sold-off sharply after the 50% level at $52.12 was taken out convincingly.
The new short-term range is $45.24 to $53.41. Its retracement zone at $49.33 to $48.36 is the primary downside target. Like the WTI futures contract, the Brent crude oil contract is in a position to test a key retracement area that will likely determine the near-term direction of the market.
We’re expecting aggressive, counter-trend buyers to come in on a test of $49.33 to $48.36. If successful, this could launch a return rally to $53.41. If this top is taken out then the trend will change to up and we could finish the year with a strong rally.
If sellers continue to dominate the trade then look for $48.36 to fail as support. This would likely lead to increasing selling pressure with $45.24 the primary downside target.
Conclusion
We’ve seen this chart pattern repeat several time this years with the same result. In addition to the same lower-top, lower-bottom chart pattern, we’re going to be watching the size and duration of the swings to determine if the selling pressure is getting stronger or weaker in terms of price and time.
If the breaks start to get shorter and the rallies start to get longer then this will also serve as a sign that the buying may be greater than the selling at current price levels. If this is the case then it will be just a matter of time before the trend changes to up.
Weekly S&P Select Energy SPDR Fund (XLE)
(Click to enlarge)
We can’t look at the crude oil market without analyzing the XLE especially since the stock market is starting to look like it’s getting ready to roll over to the downside.
The XLE is also posting a series of lower-tops and lower-bottoms on the weekly chart. It has been trending in the opposite direction of the major stock index futures all year.
The main range is $49.93 to $78.45. Its retracement zone at $64.19 to $60.82 is currently being tested so let’s just say it’s making a normal correction of the rally.
This zone is very critical to the longer-term structure of the market because it represents value. Buyers are going to have to step in to stop the price slide on a test of this zone, or the XLE will continue to drive lower.
A combination of weak crude oil prices and the start of a downtrend in the broad-based stock indexes could trigger an acceleration to the downside. This would be bearish news for XLE investors.
Holding inside the retracement zone then recovering $64.19 will indicate the presence of buyers. Overtaking $67.13 will change the main trend to up.
If $60.82 fails as support then this will signal the selling is getting stronger. Taking out the next main bottom at $59.94 will reaffirm the downtrend and put the XLE in a position to drop even further.
