Shift In Production May Herald A Price Bottom

September Crude Oil

(Click Image To Enlarge)

Although September Crude Oil futures are set to finish the month sharply lower, the market is in a position to post a weekly closing price reversal bottom, which could fuel the start of a 2 to 3 week counter-trend rally and possibly more.

On Tuesday, July 28, crude oil reached a low at $46.68, but closed higher for the day. The subsequent reversal on the daily chart has put the market in a position to also form a potentially bullish closing price reversal bottom on the weekly chart. This will occur following a close over $48.14 on Friday.

A reversal bottom will not mean the trend is getting ready to change to up, but it could trigger the start of a 2 to 3 week rally. Beside the higher close, the market is also in a position to overcome a steep downtrending angle that has guided prices lower for seven weeks. This angle moving down $2.00 per week from the $62.51 main top, drops in at $46.51 this week. A sustained move above this angle will mean that momentum has shifted to the upside.

Crude oil is also in a position to overcome the previous bottom at $46.69. This level is important because overtaking this level could force short-sellers who sold a break down under this level to cover their positions. This will also signal a shift in momentum to the upside.

Based on the $62.51 to $46.68 range, the first upside target is a downtrending angle at $54.51. The primary upside target is its retracement zone at $54.60 to $56.46.

September Unleaded Gasoline

(Click Image To Enlarge)

September Unleaded Gasoline futures are also sporting signs of a potential reversal to the upside. This could trigger the start of a 2 to 3 week short-covering rally.

The main range is $1.5081 to $2.0866. Its retracement zone is $1.7974 to $1.7270. On Wednesday, July 29, the market tested the Fibonacci level at $1.7270. The inability to break through this level encouraged short sellers to take profits and the rally began.

A new short-term range could be forming between $2.0866 and $1.7270. If the follow-through buying is strong enough this week then look for the start of a possible retracement into $1.9068 to $1.9492 over the next 2 to 3 weeks.

Exxon Mobil (XOM)

(Click Image To Enlarge)

Exxon Mobil (XOM) is also in a position to post a dramatic weekly closing price reversal bottom. The rally from $78.97 produced an outside move on the weekly chart which suggests aggressive short-covering and the presence of new long investors.

The near-term range is $90.09 to $78.97. This makes its primary upside target $84.53 to $85.84 over the next 2 to 3 weeks. Trader reaction to this zone will likely determine the direction of the market for the rest of the year.

Since the main trend is down, sellers are going to try to defend the trend on a test of the retracement zone. If successful, then a new secondary lower top will form, signaling a resumption of the selling pressure. If the buying is strong enough to take out this zone then this could create enough upside momentum to challenge the main top at $90.09.

Investors should also watch the price action at $83.20 on Friday, July 31. A close over this level will completely reverse the month to up. This could be a major sign that the low has been reached for the year.

Fundamentals

The main catalyst behind the reversals to the upside in crude oil, gasoline and oil stocks were surprise drops in crude oil supplies and production.

July has been a terrible month for crude oil with Saudi Arabia and the U.S. increasing production. Also helping to create volatility and to drive the market lower was the huge sell-off in Chinese equity markets and reports which showed a slowdown in their economy.

On July 29, the U.S. Energy Information Administration reported that U.S. crude oil inventories fell by 4.2 million barrels last week. Analysts and traders were looking for a drawdown of about 100,000 barrels.

U.S. oil production also fell by 145,000 barrels a day to 9.4 million barrels a day. This was the largest one-week decline since October 2013. Analysts and traders could not pinpoint a specific event that could have caused the drop in production so this could represent a change in trend. It probably proves the old saying, "Nothing cures low prices like low prices".

Also supporting the rise in crude oil prices was the drop in crude stocks at the Cushing, Oklahoma delivery hub. Inventories fell by 212,000 barrels the week-ended July 24.

Gasoline stocks dropped by 363,000 barrels. Analysts were looking for a 512,000 barrel gain.

The crude oil report was significant enough to reverse crude, gasoline and oil stocks to the upside. The size of the shift in production may be the catalyst this market needed to put in a significant bottom. If short, make sure you have an exit strategy or the market may force you to take its price. Aggressive counter-trend traders should consider playing the upside.