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Jim Hyerczyk

Jim Hyerczyk

Fundamental and technical analyst with 30 years experience.

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Volatility Is Back In Oil, What Does It Mean?

Offshore Oil Rig

August Crude Oil futures plunged this week and are in a position to post a nearly 6% loss for the week as investors reacted to a volatile U.S. Dollar, driven by fears of a Britain exit from the European Union. The biggest fear is that a vote to leave the EU will plunge the Euro Zone into a recession, leading to a drop in demand for crude oil.

Besides the fear of a UK exit from the EU, other factors contributed to this week’s rapid decline including a rise in the U.S. rig count and a lower-than-expected drawdown in U.S. crude inventories in spite of peak summer driving demand in the United States.

The lingering production disruptions in Nigeria seemed to take a backseat this week perhaps under the assumption that other countries will make up the shortfall, or the problem would be resolved. Traders also had a muted reaction to the International Energy Agency’s proclamation that the crude oil market is essentially balanced at this time.


(Click to enlarge)

Technically, the main trend is up according to the weekly swing chart. However, the current price action suggests a shift in momentum and investor sentiment is taking place. In plain talk, the market is simply pulling back after a nine-week rally.

The short-term range is $38.14 to $52.28. This makes its retracement zone at $45.21 to $43.54 the primary downside target next week. Since the main trend is up, buyers are likely to step in on a test of this zone in an effort to produce a new higher bottom.

The main range is $32.22 to $52.28. Its retracement zone at $42.25 to $39.88 is another potential target area. A test of this zone could also attract buyers especially if volatility caused by the Brexit vote creates wild swings in the market.

Essentially, buyers will be looking for value on this break. The chart pattern indicates the market is far from turning the trend to down and the fundamentals, according to the IEA, say the market is balanced. It is definitely not a panic situation at this time, just a normal correction in a bull market.

Adding to the weakness this week was a break through a key support angle, moving up $1.00 per week from the $38.14 main bottom. This angle is at $49.14 next week. Buyers would have to overcome this angle to change the momentum back to up.

On the downside, the first target is the short-term 50% level at $45.21. The best target and buy area next week is a price cluster formed by the short-term uptrending angle at $43.64, a Fibonacci level at $43.54 and another uptrending angle at $43.22.

If the selling continues into next week, I believe buyers will show up in a big way between $43.64 and $43.22 so be prepared for a possible reversal to the upside.

A break through $43.22 may be triggered by excessive volatility, but I suspect that once the markets calm down, buyers will come back in to overcome this level and reestablish support.

Looking at the weekly swing chart, we see that the last correction was $44.09 to $38.14 from the week-ending March 18 to the week-ending April 8, or -$5.95 in 3 weeks.

A three-week break of $5.95 from $52.28 would target $46.33 the week-ending June 24. This week’s low at $46.65 puts the market a little ahead of schedule.

All I’m trying to point out this week is that when you break it down, the current selling pressure is orderly and constructive. Volatility may be high on the short-term charts, but it can’t be predicted, it can only be embraced.

My conclusion is that the selling pressure is likely to continue for 1 to 2 more weeks with the first buying opportunity coming in on a test of $45.21 to $43.54. The best value area appears to be $43.64 to $43.22.

The main trend is up according to the weekly chart and the fundamentals are supportive so if you are a long-term bull and willing to be patient, you’ll probably get a good buying opportunity after the market makes its correction.

Waiting for a normal pullback into a support zone is a good decision because we can see exits if we are wrong. And it certainly beats just guessing or reacting to the news.

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