This week can best be described as a “yeah, but…” week. As in “yeah, there are wildfires in Canada helping to cut output by 1 million barrels per day, but the fires have been contained”. “Yeah, the American Petroleum Institute’s (API) reported a build of 3.5 million barrels in preliminary data issued on Tuesday, but the U.S. Energy Information Administration said on Wednesday that U.S. crude inventories fell 3.4 million barrels the week-ending May 6.” “Yeah, Kuwait said ‘I assume fundamentally the price (rise) represents the fall of production’, but in a sign of an ongoing aggressive fight for market share, Iran has set its June official selling prices for heavier grades it sell to Asia at the biggest discounts to Saudi and Iraqi oil since 2007-2008.”
The mixed news was not enough to break the crude oil market this week, which tells me there may be other forces working to support the uptrend. These forces may be the general belief that the market has started to rebalance. And this is giving investors the incentive to continue to support the market on weakness. No one seems willing to sell a downtick or buy an uptick, yet the market continues to producer higher-highs and higher-lows, putting it in a position to continue to grind higher over the near-term.
This idea received additional support this week when the International Energy Agency raised its 2016 global oil demand growth forecast to 1.2 million barrels per day (bpd) from 1.16 million in April.
If there is going to be a short-term top, it is likely to occur because of technical factors. The market seems to be absorbing bad news and accepting good news so something technical like an overbought oscillator or the balance of price and time is likely to put in a short-term top.
Technically, July Crude Oil’s main trend is up according to the daily swing chart. The trend will turn down on a trade through $37.50 so it’s safe to say the trend won’t be turning down next week unless the market breaks over $12.00.
Next week will be the 6th week up from the recent bottom at $37.50. Closing price reversal tops tend to occur between 7 to 10 weeks from a main bottom. So from a timing perspective, we don’t have to worry about a closing price reversal top until the weeks-ending May 20 to June 3.
The main range is $64.00 to $31.61. Its retracement zone is $47.79 to $51.63. This zone is a very important retracement area that could draw the attention of short-sellers and profit-takers. Over the next few weeks, we’ll have to watch the price action and order flow inside this zone to determine whether the buying is getting stronger or the selling pressure is increasing. If a short-term top is going to form then it will likely do so inside the retracement zone.
Crude oil is also being guided higher by an uptrending angle from the $31.61 main bottom, moving up at a rate of $1.00 per week. This angle moves up to $48.61 next week. In order to maintain the pace of the upside momentum, crude oil must sustain a rally over this level or the market will start to attract sellers.
The angle comes in at $49.61 the week-ending May 27 and at $50.61 the week-ending June 3.
(Click to enlarge)
Looking at the weekly swing chart, we have identified the first rally as $31.61 to $43.69. A move of 12.08 over 8 weeks. From the $37.50 main bottom, a similar move targets $49.58 the week-ending June 3.
Combining the retracement zone, the uptrending Gann angle and the swing chart analysis, we have concluded that the most likely meaningful short-term top is likely to occur at $49.58 during the week-ending June 3.
Thursday’s close at $47.79 puts crude oil in a position to challenge our objective next week. We’re going to monitor the price action and order flow as the market nears $49.58. It’s not important to us to pick the exact top, but more important to short this market on the way down as investor sentiment begins to shift.
This article should be used as a guideline as to when and where a top could form. However, we still have to have the presence of a big seller to encourage longs to get out of their positions before the market will begin to move lower.