Crude oil futures were under pressure this week after reports showed large weekly builds in U.S. petroleum products and forecasts by the International Energy Agency and OPEC indicated the global crude glut could continue to build into early 2017.
December crude oil futures fell on the news and are expected to finish the week lower. Gasoline futures posted an inside range and are in a position to close the week higher. Heating oil futures also survived negative news and are within striking distance of finishing the week unchanged.
On paper, the Energy Information Administration's report for the week-ending September 9 looked bullish for crude oil and bearish for the products, but that assessment isn't showing up on the charts.
What the charts do show are markets trying to hold on to the bullishness from the first half of the year. I can't see a bear market developing despite the new forecasts, but I do see evidence that traders are looking forward enough to realize that there is hope for stabilization of production and that eventually this supply glut will go away or at least become contained.
The price action also seems to suggest that traders have become immune to the government and private sector reports. This may be why the markets have been rangebound. The theme seems to be, "hold the market in a range then react to the reports then hold the market in a range".
It could just be the OPEC meeting at the end of the month that is encouraging traders…
Crude oil futures were under pressure this week after reports showed large weekly builds in U.S. petroleum products and forecasts by the International Energy Agency and OPEC indicated the global crude glut could continue to build into early 2017.
December crude oil futures fell on the news and are expected to finish the week lower. Gasoline futures posted an inside range and are in a position to close the week higher. Heating oil futures also survived negative news and are within striking distance of finishing the week unchanged.
On paper, the Energy Information Administration's report for the week-ending September 9 looked bullish for crude oil and bearish for the products, but that assessment isn't showing up on the charts.
What the charts do show are markets trying to hold on to the bullishness from the first half of the year. I can't see a bear market developing despite the new forecasts, but I do see evidence that traders are looking forward enough to realize that there is hope for stabilization of production and that eventually this supply glut will go away or at least become contained.
The price action also seems to suggest that traders have become immune to the government and private sector reports. This may be why the markets have been rangebound. The theme seems to be, "hold the market in a range then react to the reports then hold the market in a range".
It could just be the OPEC meeting at the end of the month that is encouraging traders to maintain the two-sided trade. Perhaps the bigger players just don't want to get in the way of this meeting just in case it contains surprises.
That's probably the best excuse for this choppy price action. After all, we're also seeing the same price action in the equity markets ahead of next week's Fed meeting. It seems at times that there is so much information coming out to supposedly guide traders in the right direction, but all it's causing is analysis paralysis.
TECHNICAL ANALYSIS
Weekly December Crude Oil
(Click to enlarge)
The main trend is up according to the weekly swing chart. Momentum, however, is to the downside. The trend will turn down on a trade through $41.58. A move through $50.59 will signal the return of buyers.
The weekly chart shows the market has been bouncing off a pair of retracement zone for several weeks at $47.60 to $49.02 and $46.08 to $45.02.
The first set of levels has been providing resistance, the second set support. As of September 15, the market is in a position to close below $45.02. This will set a bearish tone going into next week, but I don't think a move through this level will lead to a sharp plunge just yet.
Lurking below the short-term retracement levels is the major 50% to 61.8% zone at $43.84 to $41.53. This area stop the break in early August at $41.58, leading to a $9.00 rally. This tells me that the bullish traders are willing to defend this zone so we have to be careful selling weakness into it.
The first key area to watch next week for potential support is the 50% price at $43.84 and the December 31, 2015 close at $43.83. If there is a price zone on the chart that bullish traders are likely to aggressively defend then I believe it's the $43.84 to $43.83 support cluster.
I think that taking out the $43.84 to $43.83 support cluster this late in the year would send a serious message to traders that this market is headed lower into the end-of-the-year. Watch the price action and read the order flow on a test of this zone all week.
Weekly December Unleaded Gasoline
(Click to enlarge)
The main trend is down according to the weekly swing chart, however, momentum is up. A trade through $1.4184 will signal the buying is getting stronger, but the trend won't change to up until $1.4654 is taken out.
The downtrend will resume under $1.1800, but we're too far above this price this week to worry about this given normal weekly volatility.
Because of the two retracement zones at $1.3227 to $1.3564 and $1.2682 to $1.2328, I see choppier, two-sided trading until either buyers or sellers take control with conviction.
A close over $1.3564 will give me a little confidence that this market is headed higher, while a close under $1.3227 will likely mean we are going to retest previous support levels.
Weekly December Heating Oil
(Click to enlarge)
December Heating Oil is still in an uptrend based on the weekly swing chart, however, momentum is pointing lower because of the secondary lower top at $1.5797.
If bearish traders continue to defend the retracement zone at $1.4720 to $1.5097 then buyers will eventually give up and the market will start to rollover to the downside.
However, don't expect a big break in the heating oil market until the buyers give up $1.4145. The weekly chart indicates that this is the trigger point for a steep sell-off so expect it to be vigorously defended by those trying to defend the longer-term uptrend.
Weekly S&P Select Energy ETF (XLE)
(Click to enlarge)
XLE traders will be facing a major decision this week based on the price action. The recent steep sell-off from the 71.94 has driven the market into a major retracement zone at $68.26 to $67.39.
On the way down, the XLE changed the trend to down on the weekly chart when it took out the previous bottom at $67.77, however, there wasn't much of a follow-through move because of the retracement zone.
At this time, XLE investors face the classic battle between trend traders and value-seekers. The trend traders are trying to gain control of the downside, while the bargain-hunters have stepped in to stop the price slide.
The key number to watch is the 50% level at $68.26. A sustained move over this level will indicate the presence of buyers. Their next upside target is $69.67 to $70.21.
A sustained move under $68.26 will signal the presence of sellers. If they gain control, they are going to go after the $67.40 to $67.39 area. A failure to hold $67.39 will likely lead to a test of $67.19 and if this price fails then look out to the downside.
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