Worries about OPEC’s latest production decision due on June 5 overrode the potential bullishness of this week’s U.S. Energy Information Administration report. The EIA report showed that U.S. stockpiles fell for a fifth consecutive week, but this didn’t seem to excite buyers enough to challenge the recent top at $63.62.
The problem is essentially the pace of the weekly drawdowns. Traders may also be having trouble with the total inventory figure of 477.4 which is hovering near an 80-year high. According to the EIA, crude inventories fell 1.95 million barrels. This was in line with trader expectations. Inventories at Cushing, Oklahoma also fell 983,000 barrels.
Trader reaction to the report suggests they want to see a faster draw down. Losing nearly 2 million barrels represents some demand, but not nearly enough to trigger a drawdown that could produce declines comparable to the nearly 10 million barrel increases at the height of the bear market.
This week’s OPEC meeting also weighed on crude oil prices. This is because traders are pricing in the strong possibility that the cartel will reaffirm its output target of 30 million barrels per day. Although there may be a call from some producers to cut output, OPEC is likely to continue to produce about 2 million barrels per day above its target.
Late in the week, a new development helped pressure prices. Traders fear that rising bond yields in the U.S. and Germany may tighten the availability of speculative money earmarked for investment in oil.
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Technically, the main trend is still up on the daily swing chart, but the closing price reversal top at $63.62 is exerting selling pressure. The first objective remains $55.54 to $53.63. This is a critical area that should attract both buying and selling.
Buyers will try to establish a new higher support base in an effort to trigger a resumption of the rally. Bearish sellers will try to drive the market through this area in order to establish a stronger top at $63.62. This could eventually lead to long liquidation that triggers an eventual test of the two bottoms at $47.87 and $47.46.
Gasoline stocks fell 334,000 barrels the week-ended May 28, compared with analysts’ expectations for a 529,000 barrel gain. Although the news was potentially bullish, it didn’t seem to excite traders. On paper, the drop in inventories suggests increased demand but perhaps not at a pace strong enough to make traders want to chase the market higher. The current price action suggests they may be looking to buy value rather than strength. This means traders may be looking to initiate new long positions at retracement levels rather than new highs.
July Unleaded Gasoline futures posted an inside day, lower-close this week. It was the third attempt to breakout over the recent top at 2.0842. The weak close suggests that selling pressure is building. The inside move indicates impending volatility.
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The first downside target is a 50% level at 1.8761. This price is also a trigger point for an acceleration to the downside into retracement levels at 1.8078 to 1.7426. This current chart pattern suggests any sell-off is likely to be labored because of the layering of the retracement levels.
Buyers may continue to come in on each test of the retracement levels since the main trend will remain up on the weekly chart until the bottom at 1.6679 is taken out.
Although the closing price reversal top at 2.0842 has temporarily stopped the rally, the trend hasn’t turned down yet. If there is a rebound rally and 2.0842 is taken out then look for a breakout to the upside with the primary target a major retracement zone at 2.2078 to 2.3674.
Monthly S&P Select Energy SPDR Fund (XLE)
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Based on the monthly chart pattern of the S&P Select Energy (XLE) ETF, oil stocks are poised to decline further if crude oil begins to break sharply. The recent price action suggests a fresh round of selling pressure started two weeks ago. This occurred when the major U.S. indices were hovering near all-time highs. The Dow Jones Transportation Average is already showing signs of weakness. If the Dow Jones Industrial Average begins a similar move then look out below.
The entire bull market for the XLE began at $37.40 on March 6, 2009 and may have ended at $101.52 on June 27, 2014. The rally lasted 63 months from bottom to top. The 50% to 61.8% retracement zone at $69.46 to $61.89 is the primary downside target.
From June 2014 to January 2015, the XLE dropped from $101.52 to $71.70. The selling pressure was so strong that the ETF almost corrected 50% of its 63 month rally in only seven months.
After bottoming in January 2015 at $71.70, the XLE rallied to $83.66 by May 2015. The lower close last month suggests that sellers have returned after a four month absence. The selling was so strong that the market couldn’t even reach its first retracement objective at $86.61.
The current range is $71.70 to $83.66. Its retracement zone and first downside target is $77.68 to $76.27. This zone is currently being tested. Buyers are going to come in and try to defend this zone in an effort to produce a potentially bullish secondary higher bottom. If successful, they will try to turn the XLE back up and try to take out the recent high at $83.66.
Taking out the $76.27 will signal the presence of strong sellers. This could lead to another sharp break into at least $71.70 and perhaps $69.46 to $61.89. The monthly swing chart suggests this market has enough downside momentum to trade as low as $53.84 by December 2015.
Watch the price action at $77.68 to $76.27 over the near-term because investor reaction to this area will tell us whether the bulls or the bears are in control.