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Jim Hyerczyk

Jim Hyerczyk

Fundamental and technical analyst with 30 years experience.

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Expect Oil Traders To Take Profits Before The Dust Settles

Expect Oil Traders To Take Profits Before The Dust Settles

Crude oil prices rose this week on worries about more supply outages from Nigeria’s main crude oil terminal. This is a short-term event that could be settled this week. This would shift the emphasis to the main concern for traders at this time – the stronger U.S. Dollar.

The dollar rallied this week to its highest level since March 29 as growing expectations that the U.S. Federal Reserve may raise rates next month prompted money managers and fund investors to cash out of long positions.

After reaching its highest level for the year, crude oil tumbled following the release of the Fed’s April policy meeting minutes that fed expectations of a June rate hike. On Thursday, New York Fed President William Dudley said the central bank was on track for a June or July rate hike.

Sellers came in on the news because of uncertainty, which tends to encourage investors to book profits until the dust settles. At this time, the fear is the stronger dollar will curtail demand from foreign traders because crude oil is a dollar-denominated commodity.

If the dollar continues to rise then crude oil prices will have to be adjusted to meet this change in the fundamentals. This could lead to the formation of a short-term top and a meaningful correction, but not a necessarily a change in trend. Traders should start to prepare for a change in the fundamentals especially since price and time suggest the market is in a good position to top out.

(Click to enlarge)

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.

This week is the 7th 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 have entered the “window of time” for a closing price reversal top. To non-technical traders, this means the market could make a higher-high, lower-close the week’s ending May 27 to June 17.

A closing price reversal top doesn’t mean the main trend is getting ready to turn, but if confirmed, it could lead to the start of a 2 to 3 week break equal to at least 50% of the last rally.

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 $49.61 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 $50.61 the week-ending June 3 and at $51.61 the week-ending June 10.

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.

Additional resistance is a long-term downtrending angle from the $64.00 main top at $51.50. This angle combines with the Fibonacci level to form a resistance cluster at $51.50 to $51.63.

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 or near $49.58 during the week-ending June 3. However, if upside momentum drives the market higher than this price then it might be tested on the way down. Either way this price presents a key balance point that will determine whether the buying is strong enough to drive the market higher, or the selling is strong enough to begin the topping process.

Thursday’s close at $48.87 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. We are looking for a balancing of price and time that could signal a top formation. 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.

To recap, based on Thursday’s close at $48.87, July crude oil has to stay above the major 50% level at $47.79 in order to maintain the upside bias. Overtaking the steep uptrending angle at $49.61 will mean the buying is getting stronger. This could create enough upside momentum to challenge the resistance cluster at $51.50 to $51.63. Sellers are likely to come in on a test of the resistance cluster. If the selling is strong enough then look for closing price reversal top by the end of the week.

Taking out the 50% level at $47.79 will mean the selling has already started. This could lead to an acceleration to the downside with the first target an uptrending angle at $44.50.

In summary, price and time has put July crude oil inside a key retracement zone, identified as $47.79 to $51.63 that could stop the rally. In addition, the market is in the window of time for a potentially bearish closing price reversal top. So start looking for signs of a top.

Trend traders should look to move up stops. Other longs should consider booking profits. Aggressive speculators could consider the short side of the market.

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