March Crude Oil traded sharply lower last week with an expanded range. Based on the previous week’s failure to follow-through to the upside when the market took out the previous top at $103.20 on its way to $103.90, it looks as if buyers are scarce at the current price level. The close below the psychological $100 price as well as a major .618 Fibonacci level at $99.99, are also signs that crude oil may have gotten too expensive.
Pattern watchers will note that the market may be forming a short-term double-top at $103.20 and $103.90. Conventional pattern analysis says that this pattern will be confirmed when the bottom at $92.95 is broken. Swing chart analysts will note that the main trend will turn down when this price is taken out.
Additional observations of the intermediate term range of $75.92 to $103.90, suggest that the market is setting up for a 50 percent to 61.8 percent retracement to $89.91 to $86.61. Finally, Gann angle analysis has identified resistance at $105.62 and support at $90.92.
Given the strong selling power demonstrated last week, it looks as if sentiment may have shifted convincingly to the short-side. This is the picture from the technical side of the equation. The key as to whether this short-term outlook takes place is whether the fundamental traders can get on-board with the technical guys.
One of the reasons crude oil dropped to a three-week low last week was the possible six-month postponement of an embargo on Iranian crude imports by the European Union. The basis for the price of crude oil lingering comfortably above the $100 level was attributed to the implementation of this embargo. With this situation temporarily abating, many long speculators decided that the time was right to book some of their profits.
Also pressuring crude oil prices last week was the report showing that supply rose more than estimated. A drop in demand was the biggest contributing factor to this decline. This was attributed to concerns that a contracting German economy may drag Europe into a recession.
The decline in futures prices was triggered by a government report that showed crude oil inventories rose 4.96 million barrels. This was almost five times the consensus projections. With the market entering a poor demand time period and Europe moving toward a recession, last week’s drop is reflecting an impending bearish outlook.
With the geopolitical threat in Iran virtually eliminated by the European Union’s decision and Europe on the brink of a recession, it looks as if crude oil is headed lower over the near-term. The technical picture is suggesting a possible double-top and 50 percent correction of the last rally. Now that crude oil has reached a 3-week low, it looks as if the fundamental and technical traders have finally landed on the same page.
Last week’s poor close could mean that sentiment has shifted to the downside. This scenario will be eliminated by surprise news out of Iran or Nigeria which will force weak shorts out of the market. Given that this scenario is unlikely, look for traders to push the market lower this week. In addition, a stronger Dollar may also be the wake-up call that bullish traders need to begin selling out their speculative positions.
Factors Affecting Crude Oil This Week:
Supply and Demand: A bearish outlook for the European economy is likely to mean demand will fall, leading to another rise in supply.
European Sovereign Debt Crisis: With no solution in place and the situation worsening because of debt downgrades, look for the Dollar to strengthen versus the Euro, making commodities priced in dollars like crude oil more expensive.
U.S. Economy: The U.S. economy is improving, but a recession in Europe is likely to make it bend but not break. Growth projections should be cut if Europe goes into a recession, but expect the Fed to do all it can to prevent it from spreading to the U.S. In the meantime, even the threat of a recession reaching U.S. shores could mean a decline in demand.
Geopolitical Events: News that the E.U. is going to postpone its embargo of Iranian oil imports eliminates one of the reasons for holding a long-speculative position. Unless the U.S. turns up the heat, expect this news to have a bearish influence on prices. Events in Nigeria are potentially bullish, but the market is watching Iran much closer for direction.
By. FX Empire
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