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Jim Hyerczyk

Jim Hyerczyk

Fundamental and technical analyst with 30 years experience.

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Crude Set To Crumble As Stockpiles Grow

Cushing

A combination of events help drive crude oil prices sharply lower this week. On September 1 alone, prices fell over 1 percent, putting the market in a position to end the week with its biggest weekly loss since January.

The catalysts behind the selling pressure were diminished hopes for an OPEC production freeze and the growing glut from U.S. crude stockpiles.

Traders came into the September 1 session, focusing on the previous day’s bearish government report that showed a 2.3 million-barrel build in U.S. crude stocks the week-ending August 26. This figure was more than double the 921,000-barrel increase that analysts and traders were predicting.

The selling pressure began to accelerate when the ISM Manufacturing Index for August came in at 49.4, the weakest read since January. It shows manufacturing is back into recession, which could lead to lower crude oil demand.

Finally, also helping to drive crude oil into three week lows was the idea that an attempt to reach an agreement between OPEC and Non-OPEC countries to curb production is likely to fail like it has in the past.

(Click to enlarge)

Market Swings

Technically, December Crude Oil’s main trend is up according to the daily swing chart. A trade through $53.62 will signal a resumption of the uptrend. A move through $41.58 will turn the main trend to down.

Despite the uptrend, two major developments formed this week that could be early signs that the trend is getting ready to turn down. Firstly, momentum shifted to the downside with the formation of a minor top at $50.59. Secondly, another lower-low than the previous week will make $50.59 a new main top and a secondary lower top when compared to the $53.62 main top. This is a sign that short-sellers have arrived.

Because of the secondary lower top formation, we can step out and make a forecast based on the previous price swings. During a bull market, the rallies are usually greater than the breaks in terms of price and time. During a bear market, the opposite takes place.

The last break from $53.62 to $41.58 was $12.04 in 8 weeks. This break exceeded the previous breaks during the rally. This was the first sign that the selling was greater than the buying.

The next rally was $41.58 to $50.59, or $9.01 in 2 weeks. This rally was less than the previous rally in terms of price and time.

Based on the fact that we now have a possible series of shorter rallies and longer breaks developing, we can conclude that the selling pressure is increasing. Given the recent top at $50.59 the week-ending August 19 and the size of the previous break, we are going to predict a possible break into $38.55 by the week-ending October 14.

All we are expecting the market to do is sell-off exactly the same as it did from June to August in terms of price and time. Nothing fancy, no complicated mathematics. We just expect traders to continue to follow the previous swings like a roadmap.

Just like the captain of sailboat, there are likely to be a few events that try to throw the market off course. This is where your trading skills come in. I can only give you the target based on past performance, you have to navigate the trade based on news events that may at times disrupt the trend and the momentum.

Trading Ranges

Besides the price swings, traders have to pay close attention to the retracement zones because they will from time to time act like support and resistance as well as trigger points for accelerations up and down.

The main range is $34.06 to $53.62. Its retracement zone is $43.84 to 41.53. This zone provided support the week-ending August 5 when crude oil stopped at $41.58 and the buying produced a closing price reversal bottom.

The intermediate range is $53.62 to $41.58. Its retracement zone at $47.60 to $49.02 essentially stopped the short-covering rally the last three weeks.

The new short-term range is $41.58 to $50.59. Its retracement zone at $46.09 to $45.02 was the primary downside target. Currently, December Crude Oil is trading on the bearish side of this short-term zone, putting it in a weak position. We expect to see the selling pressure continue to increase as long as we stay below this zone.

Gann Angles

Gann angles are like trend lines except they move at a uniform rate of speed from previous tops and bottoms, making it easier to know where they are each week.

Based on the September 1 price action, we can see that the market is trading on the weak side of a downtrending angle, moving at a rate of .50 per week from the $53.62 main top. This angle comes in at $47.12 next week. Look for the momentum to continue on the downside as long as we stay under this angle.

On the downside, the first target next week come in at 44.08 and $42.83. Buyers may come in on the first tests of these angles, but if they fail then look out to the downside.

Conclusion

The formation of a secondary lower top indicates the selling is greater than the buying. We should get confirmation of this with the release of the latest Commitments of Traders report. We’d like to see that the hedge fund and commodity fund managers have taken short positions larger than the long positions.

The rest of the down move will be determined by how many of the smaller speculators start to pile on the downtrending market.

Playing the short-side should be pretty safe as long as OPEC doesn’t call for a production freeze. If this occurs then like before, the shorts will cover their positions and we are likely to become rangebound. In any case, have an exit strategy and use protective stops in case the market reverses back up.

The best scenario for short-sellers will be a failure by OPEC to implement a production freeze, growing U.S. inventory and decreasing demand.




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