June crude oil futures plunged on Thursday and closed in a position to do further damage to the charts as investor worries over the global supply glut essentially wiped out all of the gains attributed to the OPEC-led plan to cut output, trim supply and stabilize prices.
With crude oil trading lower for the year when OPEC began its ambitious program to fix the crude oil market and below the late November bottom when it first announced it was going to implement such a plan, traders may now have their sights set on the next major bottom from August 2016.
When the dust clears, investors are going to debate whether the OPEC-led plan was actually working, or if aggressive, optimistic hedge and commodity fund money managers were painting the tape and creating a self-fulfilling prophecy because they believed it would work.
I can remember at least three times in March, April and now May when these major players cannibalized their own positions by first slowly eating away at support then dumping positions at the same time when buyers decided to pull the rug out from under the market.
The type of trading we’ve seen in crude oil this year strongly suggests that the “Herd Theory” is alive and well. Given all the technical and fundamental data available, it’s hard to conceive that the money managers just followed each other into the pit, not once, but at least three times this year. They may have spread the buying all around while the crude oil market sat in periodic trading ranges, but when it was time to get out, they all headed to the exit at the same time and there was only one door.
June West Texas Intermediate Crude Oil
(Click to enlarge)
The main trend is still up according to the monthly swing chart, but momentum is trending lower, putting the June futures contract in a positon to take out the August 2016 main bottom at $44.56. A trade through this bottom will change the main trend to down for the first time since October 2016.
The main range on the swing chart was formed by the January 2016 bottom at $36.18 and the January 2017 main bottom at $57.95. Its retracement zone is $47.07 to $44.50. The June futures contract is currently testing this zone. It is essentially the only potential support standing between a continued sell-off towards the major bottom at $36.18.
The daily chart pattern may look ugly because of the series of lower-highs and lower-lows, but the monthly chart is showing an orderly sell-off. It all began with the bearish closing price reversal top in January at $57.95 and it has now reached the critical retracement zone at $47.07 to $44.50.
Now that the market has reached the critical retracement zone on the long-term monthly chart, we have to say it has reached a balance point between 50% and 61.8% of the 2016 low and the 2017 high.
To some, the $47.07 to $44.50 zone will represent value so we may see buyers come in to do battle with the bearish traders. Given the current price at $45.49, we’re going to watch the price action and order flow next week inside this zone because it is possible that buyers will come in to defend the longer-term trend. So don’t be surprised if the market becomes rangebound over the near-term.
We’re going to give the market the benefit of the doubt next week because it reached a potential support area on the monthly chart. I’m not sure if investors are going to get aggressively short at current price levels. Additionally, we may start to see profit-taking from the shorts.
We’ll also be watching the trading activity from the hedge and commodity funds. They may have been taken out of most of their long positions this week, but we won’t know until we see what the U.S. Commodity Futures Trading Commission has to say about net long and net long positions.
If you go back to the news on August 2, 2016, the last time crude oil was pressing current price levels, you may find a quote from CNBC.com which says, “Hedge funds have turned rather bearish toward both crude and refined products over the last two months amid signs of a gasoline glut.”
If we have hit oversold levels then we may be ripe for a reversal to the upside. It will all depend on how investors handle the test of $47.07 to $44.50 and the main bottom at $44.56. We’ll also be watching to see what the hedge funds do because they seem to be the best contrary indicator this year.