September crude oil reaffirmed its weekly downtrend last week on the trade through the late June bottom at 90.17. Besides trading lower for the year, crude oil also took out the low for the year and is rapidly approaching the May 2010 major bottom at 79.19.
Friday's technical closing price reversal bottom suggests oversold conditions and the start of a possible short-covering rally. A move through 88.32 on the daily chart will confirm the reversal bottom at 82.87. Depending on the upside volatility and based on the current range of 100.62 to 82.87, a strong follow-through rally could drive the market into a retracement zone at 91.75 to 93.84 over the near-term.
Volatility was highlighted last week in the crude oil market. Various factors led to the volatile moves. At times the market was influenced by the Dollar, equity prices, and economic reports. The overwhelming theme however seemed to be centered on the possibility of a major global economic slowdown. With negative factors taking control of the market, Nymex crude oil posted a 9.2 decline for the week.
Higher equity prices played a supportive role for the market on the opening for the week as the market focused on the resolution of the U.S. debt ceiling crisis. This euphoric rally was short-lived as investors left the equity markets in droves throughout the week, shedding both stocks and commodities, and driving crude oil prices sharply lower. By the middle of the week it was clear that investors wanted to be in cash or cash equivalent as fear swept the market. Although panic selling never really set in, selling activity was furious at times.
By Friday, crude oil had reached a technically oversold price level. This combined with a better-than-expected U.S. jobs report and signs of progress in Europe's debt crisis made short traders think twice about carrying large positions over the week-end and the market finished higher.
Despite the rebound in prices on Friday, the market remains in a downtrend and is likely to attract fresh selling pressure following a sizeable retracement. Over the week-end the S&P Corp. downgraded the U.S. Treasury market from AAA to AA+. This may have already been priced into the market, but if it hasn't been, crude oil will plunge if equity markets get hit hard on the opening Sunday night/Monday morning.
The direction of the market this week will be decided by the same factors which produced volatile conditions last week: The Dollar, equity prices, demand for risky assets and economic conditions. The Fed meets next week and its decision will also be watched closely. Some traders are looking for talk of additional quantitative easing.
• The news that the S&P Corp. cut the rating of U.S. Treasury instruments broke after the markets closed on Friday. At this time, traders are assessing the influence this event may have on the markets. Some traders believe that this news has already been priced into the markets. Others feel that the news means more downside pressure. Either way, expect volatile trading conditions.
• Crude oil prices have attached themselves to the equity markets in terms of direction and volatility. If investors continue to shed equities, then look for more downside pressure on crude prices.
• Although the week ended with a slightly upbeat employment outlook, a possible U.S. and global economic slowdown is still on the minds of traders. Weak economies mean weak demand and lower prices.
• Traders will be watching activity in the Euro Zone. Clearly Spain and Italy need financial aid. At the close on Friday, traders thought the European Union was close to a resolution of the sovereign debt crisis. Talk was circulating that Italy was close to labor reforms and a balanced-budget amendment to its constitution. This would please the Euro Zone authorities and may underpin prices.
• Tuesday's (August 9) U.S. Federal Reserve Policy meeting could set the tone for the week if they offer an upbeat outlook for the economy or hint at another quantitative easing plan. Although the previous plans have failed, they provide liquidity to the markets which weaken the U.S. Dollar and drive up commodity prices.
By. FX Empire
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