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Jim Hyerczyk

Jim Hyerczyk

Fundamental and technical analyst with 30 years experience.

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Markets Adjusting ‘’Violently’’ From 8 Week Plunge

September Crude Oil futures are poised to close higher for the week, signaling a shift in momentum back to the upside, after a prolonged move down in terms of price and time. The move didn’t come as a surprise since crude oil began the week eight weeks down from its June top. This put the market in the window of time for a potentially bullish closing price reversal bottom. It was also testing a major retracement zone and nearing an important bottom – all of the factors talked about in last week’s article that warned traders that price was too far ahead of time.

So the market is basically making an adjustment because it was moving down faster than $1.00 per week which is close to the normal rate of speed for a sell-off. Markets that accelerate to the downside in almost vertical fashion tend to reverse after sellers have exhausted themselves. Sometimes it’s orderly like the reversal currently taking place. And sometimes it’s violent.

To trade crude oil successfully, sometimes you have to set aside the stories and read the price action and order flow. Sometimes you have to get inside of the head of the short-sellers. When a market drops cleanly at a relatively quick speed like crude oil has done the past 8 weeks, it’s easy to get complacent. However, as with any profitable position, no one wants to go through a painful “giveback” of their open position profits.

So when a market hits a downside target zone, short-sellers start taking profits. When a market stops going down, short-sellers start to book their profits and when a weak market fails to follow-through to the downside and crosses back over the previous week’s close, short-sellers start to square their positions. All of these things happened this week, putting the market in a position to post a closing price reversal bottom.

Typically, closing price reversal bottoms trigger a 2 to 3 week counter-trend rally back to 50% of the last break. Whether September Crude Oil futures complete this retracement will be determined by the price action and order flow.

If renewed selling pressure is met with aggressive buying then the short-covering rally will continue over the near-term. Buyers are going to try to take out price levels that will trigger an extension of the rally. These are usually price levels where investors like to hide their buy stops. They include the previous week’s high, a retracement level or a downtrending resistance angle.

These buyers are going to try to squeeze the weak short out of the market so that they can sell at more favorable price levels. It may be a revelation to some that not all buyers are in there to take the market to the moon, but actually in there to push prices into levels that allow them to re-enter speculative shorts at good risk/reward areas, while others want to hedge their physical oil at value areas.

Those who rely on the news during this type of market are usually late to the party. This week started with bearish stories of oversupply and low demand, but all it took was a deviation of an estimate in an actual inventory report to change traders’ opinions about the market.

Sometimes you just have to accept that markets do run out of sellers, or that the buying is greater-than-the sellers at certain price areas. In the short-run, it’s not always about the supply/demand fundamentals. Sometimes it’s just a fund manager saying, “I’m going to take profits because I don’t want to give back what I’ve worked hard to gain over the last eight weeks.”

Technical Analysis

(Click to enlarge)

Despite the eight-week sell-off, the main trend is still up if you are following the weekly swing chart. However, momentum has been down since the week-ending June 10. The trend will turn down on a trade through the last swing bottom at $38.67.

I know it’s hard to say the trend is up, but if you follow a weekly chart that defines an uptrend as higher-tops and higher-bottoms then you should know that this interpretation is valid because the last main bottom has not been violated. This is also why buyers came in this week at $39.19 to defend the uptrend and the main bottom at $38.67.

The main range is $32.85 to $52.73. This is the range for the entire year. Its retracement zone is $42.79 to $40.44. This 50% to 61.8% zone represents value to some major players. This is like a do-over for speculators who missed the bottom in January and didn’t want to buy the top in June.

In addition to the retracement zone, the market found support at or near an uptrending angle, moving at a pace or 25 cents per week from the contract low. This angle comes in at $40.10 next week. It is essentially an extension of the bottom at $32.85, moving up at a uniform rate of speed.

Now that we’ve had the prolonged move down in terms of time (8 weeks), and a lower low, all we need is a close above $41.60 to produce a potentially bullish closing price reversal bottom. A close over this week’s opening at $41.35 will also take place, meaning that pattern, price and time are all coming together. This will be a strong sign that the buying is greater than the selling at current price levels.

If there is a follow-through rally next week then the first upside objective will be the main 50% level at $42.79. If this price doesn’t bring in the short-sellers then look for the rally to expand to the upside with the next target a downtrending angle at $43.73 (Blue Angle). This angle has guided the market down for eight weeks so overcoming it will be another sign of strength.

The new short-term range is $52.73 to $39.19. If the buying is strong enough then we could see a 2 to 3 week rally into its retracement zone at $45.96 to $47.56.

Conclusion

Short-sellers are going to have to decide next week to move down stops to protect profits, or the market will be in a position to rally further and force you out at the worst possible moment.

If there is reversal bottom the week-ending August 5 then the first level to place a stop would be over the reversal week’s high. The second is the 50% level at $42.79 and the third is over a steep downtrending angle at $43.73.

If there is no follow-through to the upside then we could see a retest of the Fibonacci level at $40.44 and the uptrending Gann angle at $40.10. This is followed by the low at $39.19.

Taking out $39.19 will likely trigger a move into the main bottom at $38.67. If this price fails then the weekly trend will officially change to down.




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