March Crude Oil closed lower last week after posting an expanded range. The market continued its downslide that began five weeks ago when it topped out at $103.90.
Heavy selling pressure early in the week drove the market close to a key 50 percent price level at $95.40. After it reached the low for the week on Thursday at $95.44, traders showed their respect for the 50 percent level by creating a short-covering rally that prevented the market from closing on its low.
The weekly chart indicates layers of support this week. The first level is the aforementioned $95.40. This is followed by uptrending Gann angle support at $93.92. A break through this price will set up the market for a test of the December 16 swing bottom at $92.95.
A possible double-top chart pattern is still in the works with $103.20 and $103.90 the key highs. A trade through these levels will reaffirm the main uptrend while a break through $92.95 will not only turn the main trend to down, but it will also confirm the double-top.
Based on the main range of $75.92 to $103.90, a break through $92.95 will put the market in a position to test another 50 percent to 61.8 percent retracement zone at $89.91 to $86.61. Given the nature of the trade in the crude oil market, traders should always watch for technical bounces when support or resistance levels are reached.
The stronger U.S. Dollar early in the week had much to do with the crude oil weakness. As the Greenback improved, commodities priced in dollars became more expensive and their demand fell. This action contributed to crude oil’s over 3 percent drop from Monday to Thursday. The market stabilized a bit ahead of Friday’s U.S. Non-Farm Payrolls Report, and rallied on Friday when the report came out better than analysts expected.
The fact that crude oil is trading near an important mid-point on the charts is a strong indication of indecision. Since topping near $104.00, crude oil has steadily declined on low demand for product despite better U.S. economic reports. Additionally, prices have fallen since the European Union decided to postpone an embargo of Iranian crude oil. Finally, the easing of tensions in the Strait of Hormuz has also given bullish traders an excuse to book profits. In addition, speculators took out the “war” premium. Psychologically, the failure to hold $100 per barrel probably helped accelerate the market’s decline the past two weeks.
The chart action indicates both trader uncertainty and trader indifference. The uncertainty is being triggered by worries that Greece may not be able to negotiate favorable debt structure terms with the European Union. The fact that oil has been falling for weeks while the Euro has been rising is proof of this. The weaker Dollar has not fueled upside price activity at all, but a strong Dollar, on the other hand, has translated into downside pressure.
The rising stock market has not helped crude prices either. This is a strong indication that although there is demand for higher yielding assets, institutions and fund managers have decided to leave crude oil out of their portfolios.
This leads me to conclude that the supply and demand situation is having the biggest influence on the market at this time. It took a while, but traders have finally caught on to the fact that supply is rising and this means lower prices to follow.
Trader should watch for the decline to continue early this week, however, short-traders should be careful not to get caught in a wicked short-covering rally when the market tests the key support levels at $93.92, $92.95 or $89.91.
Factors Affecting Crude Oil This Week:
Supply and Demand: Demand continues to fall, driving up supply. This is the simple explanation for the recent drop in prices. Until the weekly inventory report begins to show an uptrend, traders should expect this report to cast a bearish pall on the market.
European Sovereign Debt Crisis: Uncertainty over Greece is hurting crude oil prices. On February 9 the European Central Bank is going to decide monetary policy. Last month it held interest rates steady at 1.00 percent, triggering the start of a rally in the Euro. Traders will be watching to see if the central bank remains optimistic about the Euro Zone economic situation. If traders buy the Euro with clarity and conviction then the Dollar will fall. At some point, oil traders are going to have to pounce on the market if prices become cheap enough.
Geopolitical Events: Taking Iran out of the equation has definitely hurt prices. Speculators have left the market but can quickly return if a bullish situation arises.
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