(Click to enlarge)
FUNDAMENTAL ANALYSIS
With the crude oil chart indicating a range bound trade, this week we’ll take a look at both sides of the market since crude could remain in its range until at least December 4 when OPEC will give its next marching instructions to traders.
THE BULLISH SIDE OF THE CHART
The promising closing price reversal bottom by the December Crude Oil futures contract the week-ending October 30 was a positive signal for crude oil bulls, but the weak follow-through rally last week suggests that sellers are still in control. Even with the potentially bullish chart pattern, all the bullish traders could muster was a normal correction in a bear market.
Despite last week’s weakness and lower close, the “somewhat” bullish tone will remain intact unless the $42.58 reversal bottom is taken out. If it holds as support then this could encourage more buying because the chart pattern will take on a more bullish look because of the formation of a possible secondary higher bottom.
Let’s go back a couple of months and revisit the current price action. December Crude Oil posted a closing price reversal bottom the week-ending August 28 at $39.22. This led to a follow-through rally that initially took us to $50.89, but after a series of inside weeks, finally topped at $51.42 the week-ending October 9.
The so-called “first leg up” is important because it is the one in the chart…
(Click to enlarge)
FUNDAMENTAL ANALYSIS
With the crude oil chart indicating a range bound trade, this week we’ll take a look at both sides of the market since crude could remain in its range until at least December 4 when OPEC will give its next marching instructions to traders.
THE BULLISH SIDE OF THE CHART
The promising closing price reversal bottom by the December Crude Oil futures contract the week-ending October 30 was a positive signal for crude oil bulls, but the weak follow-through rally last week suggests that sellers are still in control. Even with the potentially bullish chart pattern, all the bullish traders could muster was a normal correction in a bear market.
Despite last week’s weakness and lower close, the “somewhat” bullish tone will remain intact unless the $42.58 reversal bottom is taken out. If it holds as support then this could encourage more buying because the chart pattern will take on a more bullish look because of the formation of a possible secondary higher bottom.
Let’s go back a couple of months and revisit the current price action. December Crude Oil posted a closing price reversal bottom the week-ending August 28 at $39.22. This led to a follow-through rally that initially took us to $50.89, but after a series of inside weeks, finally topped at $51.42 the week-ending October 9.
The so-called “first leg up” is important because it is the one in the chart pattern that takes out the first level of buy stops. Professional traders seldom try to pick bottoms. Most are caught short at a bottom and cover their positions with either profit-taking buy orders or by allowing trailing buy stops to be touched off. The aggressive nature of the short-covering often triggers the “spike” to the upside from a major bottom which we see in many charts.
The “secondary higher bottom” is the one that is produced by real buyers. Once these investors see that the first bottom has been reached, they tend to come in and buy a retracement of the first leg up. This may have occurred the week-ending October 30 when crude oil produced another potentially bullish closing price reversal bottom at $42.58.
The first leg up was a move of $12.20. If $42.58 holds as support then at a minimum we can look for a similar move which will take us back to at least $54.78. Based on time analysis, however, it may take another five weeks before we can possibly see that price.
THE BEARISH SIDE OF THE CHART
Looking at December Crude Oil from a bearish perspective, we can clearly see that it is in a downtrend as evidenced by the lower-tops and lower-bottoms. Based on the current “swing” formation, the trend will remain down until a swing top is taken out. This top is $51.42.
The closing price reversal bottoms the week-ending August 28 and October 30 temporarily stopped the price slide and triggered meaningful retracements that all failed to take out any important tops. This is normal in a bear market because even with extremely bearish fundamentals, markets do run out of sellers.
The closing price reversal bottoms serve the purpose of taking out the weaker shorts, allowing the bigger bearish traders to re-enter at more favorable positions. This is the way the game has been played for many years, across many markets. Despite the bullish appearance at times, the short-covering rallies are merely allowing the market to let off a little steam.
The main range is $63.12 to $39.22. Its retracement zone is $51.11 to $53.94. During a bear market rally, this zone serves as important resistance. It worked the week-ending September 4 when a rally stopped at $50.89 and the week-ending October 9 when crude oil topped at $51.42.
The short-term range is $51.42 to $42.58. Its retracement zone is $47.00 to $48.04. This zone helped stop last week’s rally at $48.36.
CONCLUSION
Since the recent price action is producing a two-sided trade, we have to look at both sides of the market because some readers prefer to trade the trend while others prefer to take a more aggressive approach and trade counter-trend.
Trend traders are short the market with buy stops above $51.42. Aggressive counter-trend traders are likely long from $42.58. These means that this week, the direction of the market will likely be decided by trader reaction to the retracement zone at $47.00 to $48.04.
The short-term outlook is a follows. Look for an upside bias to begin on a sustained mover over $48.04 and the downside bias to continue on a sustained move under $47.00.
Trend traders will have to be careful selling weakness into $45.32 and $43.88 because of the possibility of a wicked reversal to the upside.
Taking out $42.58 will negate the potentially bullish chart pattern and could trigger an acceleration into $39.22. However, bearish traders are unlikely to assume new short positions at extremely low price levels until they get some guidance from OPEC on December 4.
