February crude oil futures continued the rally it began several weeks ago at $92.10. Based on the break from $106.22 to $92.10, the market has already retraced more than 50% of this range. The retracement zone target at $99.16 to $100.82 could slow down the rate of ascent, but so far it doesn’t look like the move is attracting fresh shorting pressure despite the downtrend on the weekly chart.
The main trend will change to up on a trade through $102.52. A trade through $92.10 will reaffirm the downtrend. Because of this, one has to assume that the current move is still being driven by short-covering rather than fresh buying. How the market reacts inside this zone will determine the strength of the trend over the near-term.
Last week, the market broke through a downtrending Gann angle from the $106.22 top, moving .50 per week. This week, the market confirmed the move when it held above the angle, currently at $97.72.
Besides the move to the strong side of the downtrending angle and the 50% level, the market is currently in a position to test an angle moving up $2.00 per week. This angle is at $100.10 this week and $102.10 next week. Overtaking this angle will mean that upside momentum is increasing.
A failure to overcome the angle as well as the retracement zone will mean that upside momentum is slowing and that the market is getting ready to roll over to the downside. The nearest support angle is at $96.10 this week and $97.10 the next.
There was not much change in the fundamentals this week. Oversupply is still a concern, but some of the tension over this has been relieved by the improving economic conditions in the U.S. On December 20, the U.S. government announced that Third Quarter GDP increased more than expected. This news came on the heels of the Fed’s decision to begin reducing its monthly monetary stimulus by $10 billion starting in December. The central bank is expected to taper $10 billion each month as long as the economy continues to improve. The action by the Fed serves as a sign that the central bank believes the economy has improved enough to handle a reduction in stimulus.
Although crude oil has held on to its recent gains, the market could run into problems sustaining the rally if the U.S. Dollar begins to rise because of the Fed tapering. By reducing its monthly bond and mortgage buying, the Fed has indirectly raised interest rates, making the U.S. Dollar a more attractive investment. Since crude oil is dollar-denominated, a rising Greenback could decrease demand from foreign investors.
The ensuing battle between those who believe the strengthening economy will use up some of the excess supply and those who think the stronger dollar will hurt demand is likely to determine the trend of the market over the near-term. Sellers are likely to begin showing up inside the $99.16 to $100.82 retracement zone. The ability of the buyers to defend this zone will determine whether the rally continues or fails.
Besides the direction of the dollar, the unrest in Sudan is also influencing the movement in the market. Supply disruptions are taking place because of the threat of a civil war. This is helping to underpin the market. Should the unrest escalate further or spread beyond the region, crude oil could be supported for several weeks. At this time, speculators aren’t looking too closely at how much supply has been affected. They are merely reacting to the event. The rally could last until peace is reached in the region in a move very similar to what took place in Syria when crude oil was trading near $106.00. Much of the price action will be determined by whether the U.S. gets involved in the conflict.
This week, it looks like crude oil is going to get support from the strengthening economy and the issues in the Sudan. The momentum of the rally will be decided by whether speculators want to pay up for crude oil. Taking out the retracement zone at $99.16 to $100.82 will mean that speculative buying is strong.