Crude oil futures followed through to the upside this week, confirming the previous week's potentially bullish closing price reversal bottom. From the fundamental side, the catalyst behind the rally was speculation that oil producers would discuss potential action to stabilize oil prices during a meeting next month in Algeria.
The comments came at a perfect time when the market was technically oversold. Based on the price action, it appears the news gave short-sellers an excuse to book profits, leading to the powerful short-covering rally. One could also build a case for fresh longs returning to the market since the rally started inside a major retracement zone also known as a value area.
In addition to the comments from Saudi Arabia's energy minister Khalid al-Falih that fueled the strong rally on August 11, the market also received support from a new outlook published by the International Energy Agency (IEA) that said it expected the supply and demand balance to tighten towards year-end also supported prices.
Finally, from the bullish side of the equation, news of a drop of 8.1 percent in China's oil output in July, to a five-year low of 16.72 million tons also boosted prices because it implied that Asia's biggest economy has to import more crude.
Bearish traders cite two key reasons why the current rally is not likely to last. Firstly, the crude oil glut still exists and secondly, in order to be bullish, there would also need to be a decline in refining…
Crude oil futures followed through to the upside this week, confirming the previous week's potentially bullish closing price reversal bottom. From the fundamental side, the catalyst behind the rally was speculation that oil producers would discuss potential action to stabilize oil prices during a meeting next month in Algeria.
The comments came at a perfect time when the market was technically oversold. Based on the price action, it appears the news gave short-sellers an excuse to book profits, leading to the powerful short-covering rally. One could also build a case for fresh longs returning to the market since the rally started inside a major retracement zone also known as a value area.
In addition to the comments from Saudi Arabia's energy minister Khalid al-Falih that fueled the strong rally on August 11, the market also received support from a new outlook published by the International Energy Agency (IEA) that said it expected the supply and demand balance to tighten towards year-end also supported prices.
Finally, from the bullish side of the equation, news of a drop of 8.1 percent in China's oil output in July, to a five-year low of 16.72 million tons also boosted prices because it implied that Asia's biggest economy has to import more crude.
Bearish traders cite two key reasons why the current rally is not likely to last. Firstly, the crude oil glut still exists and secondly, in order to be bullish, there would also need to be a decline in refining output. At this time, storage tanks are brimming with crude oil and production exceeds consumption. These two conditions are likely to continue to weigh on the market while putting a lid on any substantial rally.
At this time, the September crude oil chart is rolling over to the October contract, but our preference is to rollover into the December contract to give ourselves a longer look at the price action.
Weekly September Crude Oil Features
Technically, the main trend is up according to the daily swing chart. The trend will officially turn down when the main bottom from the week-ending April 8 at $38.67 is violated. The recent closing price reversal bottom at $39.19 stopped short of taking out the main bottom as investors came in to defend the uptrend.
The main range is $32.85 to $52.73. Its retracement zone is $42.79 to $40.44. The current rally back to $43.52 suggests that buyers are treating this zone as major support. In addition to this zone, an uptrending angle at $40.35 is also support the week-ending August 19. This combines with the major Fibonacci level to make $40.44 to $40.35 the key support cluster next week.
Based on the current price at $43.51, the direction of the market next week is likely to be determined by trader reaction to the main 50% level at $42.79.
A sustained move under $42.79 will indicate the presence of sellers. This could lead to an acceleration to the downside with $40.44 to $40.35 the next major target, followed by the closing price reversal bottom at $39.19.
A sustained move over $42.79 will signal the presence of buyers. This will also put the market on the strong side of the downtrending angle that had been guiding the market lower since the $52.73 main top from the week-ending June 10. This angle is at $42.73 next week.
Overtaking $42.79 could trigger an acceleration to the upside since the next major target doesn't come in until $45.96. The best area to refresh short positions next week will be $45.96 to $47.56.
Basically, look for the short-term upside bias to continue as long as $42.79 remains support with $45.96 the next target. The downside bias will resume on a sustained move under $42.79 with $40.35 the next likely target.
Weekly December Crude Oil Futures
Technically, the main trend is up according to the daily swing chart. The trend will officially turn down when the main bottom from the week-ending April 8 at $39.70 is violated. The recent closing price reversal bottom at $41.58 stopped short of taking out the main bottom as investors came in to defend the uptrend.
The main range is $34.06 to $53.62. Its retracement zone is $43.84 to $41.58. The current rally back to $45.67 suggests that buyers are treating this zone as major support. In addition to this zone, an uptrending angle at $41.56 is also support the week-ending August 19. This combines with the major Fibonacci level to make $41.58 to $41.56 the key support cluster next week.
Based on the current price at $45.67, the direction of the market next week is likely to be determined by trader reaction to the main 50% level at $43.84.
A sustained move under $43.84 will indicate the presence of sellers. This could lead to an acceleration to the downside with $41.58 to $41.56 the next major target.
A sustained move over $43.84 will signal the presence of buyers. This will also put the market on the strong side of the downtrending angle that had been guiding the market lower since the $53.62 main top from the week-ending June 10. This angle is at $43.62 next week.
Overtaking $43.84 could trigger an acceleration to the upside since the next major target doesn't come in until $47.60. The best area to refresh short positions next week will be $47.60 to $49.02.
Basically, look for the short-term upside bias to continue as long as $43.84 remains support with $47.60 the next target. The downside bias will resume on a sustained move under $43.84 with $41.53 the next likely target.
As you can see, the price action and chart pattern in the September Crude Oil and December Crude Oil markets are essentially the same. So you should have no problem rolling from one to the other. All you have to do is get used to the new prices.
In conclusion, the weekly closing price reversal bottom often leads to a 2 to 3 week retracement equal to 50% - 61.8% of the last sell-off. This means that starting the week-ending August 19, we should start looking for this current short-covering rally to run into resistance at $47.60 to $49.02.
The $47.60 to $49.02 area is very important because bearish traders are going to try to produce a secondary lower top while bullish traders are going to try to take out this zone in an effort to form a new secondary higher bottom at $41.58.
