November Crude Oil finished sharply lower this week in a move driven by the U.S. Federal Reserve’s assessment of the economy. On Wednesday, September 21, the Fed stated in its monetary policy committee statement that the U.S. economy faces “significant risks”.
This spooked traders enough to trigger a flight to liquidity into the U.S. Dollar while driving down equities and commodities. Crude oil which is priced in dollars faced heavy selling pressure as traders drove down prices to levels not seen since early August.
With traders adjusting to the possibility of a slow down in the economy, the supply and demand picture is expected to change over the next few weeks to reflect lower demand.
Technically, the main trend is down on the weekly chart. It is going to take a significant rally through the last swing top at 90.69 to change the main trend to up. Although November Crude Oil posted a low this week at 77.55, the subsequent rally was probably related to short-term oversold conditions and position squaring ahead of the week-end.
Short traders are likely to continue to exert selling pressure this week in an effort to take out stops below the uptrending Gann angle at 78.36 and the August 9 bottom at 76.61. The primary target is the main bottom from May 2010 at 76.25. Continued downside pressure through this level is likely to trigger an acceleration to the downside.
Resistance is at a downtrending Gann angle at 83.39 this week. Although not likely to be tested, it is serving primarily as a guide to lower markets. With the trend on the daily and weekly charts clearly pointing lower, the only concern for traders this week is to avoid getting caught in a bear trap due to severely oversold markets.
Factors Affecting Crude Oil This Week:
• U.S. Dollar – Simply stated, a stronger Dollar means commodities priced in dollars will be perceived as too expensive. This will lower demand for crude oil, for instance, leading to further downside pressure.
• Economic Reports – U.S. economic reports this week include New Home Sales, Durable Goods, Consumer Confidence, Personal Income and Spending as well as Final GDP. Traders will be looking for further confirmation of the Fed’s assessment of the economy. More bad news is likely to mean a higher Dollar and lower crude oil.
• Bernanke - Fed Chairman Bernanke speaks on Wednesday, September 28 at 5 pm EDT. Traders should look for hints about the economy in his speech as well as clues as to the future plans of the Fed to stimulate the economy.
• Supply and Demand – Last week the U.S. Energy Department reported that weekly crude stockpiles fell sharply to their lowest level since January. The fact that crude inventories shrank by 7.34 million barrels should have supported the market, but this news was trumped by the Fed’s outlook for the economy. The sell-off in the market demonstrated that traders are pricing in the future while the inventory figures represent old news. As the economy slows, inventories should begin to build.
By. FX Empire
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