October Crude Oil posted an inside week but still managed to close higher. The inside pattern often indicates impending volatility because of the compression of the daily ranges. Since the market closed higher, there is a slight bias developing that the volatility will occur following a breakout to the upside.
After straddling a down trending Gann angle for the past three weeks at 81.55, the close on the bullish side of this angle indicates the market may attempt to launch a rally into the next downtrending Gann angle at 91.00.
Despite the formation of a potentially bullish support base, the market still has to clear the 50 percent to 61.8 percent retracement zone of the 101.00 to 76.15 range at 88.58 to 91.51. This upper level is creating a resistance cluster with the Gann angle at 91.00 to 91.51. Once the market overcomes these levels, crude oil is likely to accelerate to the upside. Until then it appears that the current action may only be setting up a bear market rally.
The fact that crude oil closed higher is a surprise given the uncertainty among investors and the wild price swings that seemed to go nowhere last week. Last week crude oil traders had to deal with the conflict in Libya, hurricane Irene, a weak GDP number and Fed Chairman Bernanke’s failure to announce another round of quantitative easing.
Although the technical charts are indicating the potential for an upside breakout, the lack of conviction by traders due to the absence of clarity on the part of the fundamentals indicate that any breakout is likely to be a labored move.
Traders should watch for a potential breakout rally this week, but also be prepared for the abrupt ending of any rally and a possible shift to the downside once again. The market’s reaction on Friday indicates that there is a tug-o-war brewing between traditional economic fundamentals and the conflict in Libya.
Factors Affecting Crude Oil This Week:
• Libyan Situation. The situation in Libya is this week’s wildcard. Traders hoping for a quick resolution to the Libyan civil war and an increase in that nation’s oil production sold crude oil initially, but by the end of the week, may have been paring positions on the thought that the conflict is going to continue to last.
Although reports indicate that the rebels have been gaining more control of the country, battles are still waging which means the news may continue to be peppered with both bullish and bearish stories, creating more uncertainty.
Even if Muammar Gaddafi is captured and a new government forms, the consensus is it is going to take weeks to months to repair the oil facilities to bring the nation up to full capacity. This may help underpin the market but should in no way be construed as bullish news.
• U.S. Economy. Last week’s economic reports were a clear demonstration of why some traders don’t pay attention to them. For example, Friday’s GDP report indicated a weak economy. Some traders viewed this as old news although there was a reaction to the downside.
Traders instead decided to focus on the future of the economy as told by Fed Chairman Ben Bernanke. In a prepared speech, Mr. Bernanke told the investing public that despite a few glitches caused by the debt ceiling debate, the U.S. debt downgrade and the lingering sovereign debt issues in Europe, the economy was in good shape. Although he didn’t commit to further stimulus, he did add that the Fed had additional tools to use should the need arise.
The news helped give rise to increased demand for higher risk assets, helping to slightly underpin crude oil on Friday although not enough to trigger outright buying.
• Supply and Demand. This section includes weather because this week the focus will be on whether Hurricane Irene caused any damage to major refining operations over the week-end. All we can do is speculate at this time since no one is certain as to which route the hurricane will take. So far gasoline is the market that is expected to be most affected.
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Traditional supply and demand studies indicate the slowing economy (despite what Bernanke said) may not be enough to support oil prices at the $85 level. Once the effects of the hurricane wear off, crude oil may be headed toward $75 fairly quickly.
By. FX Empire
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