Signs Of A Shift In Sentiment Are There, But Where Is The Catalyst?

March Crude Oil Analysis

If you're watching crude oil prices every day, you will probably say the market is volatile, choppy and directionless. If you're watching it on a weekly basis, you may say that the market is trading in an orderly fashion. The short-term charts are full of trading "noise". This is what is causing the two-sided trade.

The fundamentals are also two-sided. There are supply side fundamentals. Demand side fundamentals. Short-term fundamentals and long-term fundamentals. The constant flood of fresh news into the crude oil market is also having a major influence on the price volatility.

This week, some traders believed that the lifting of sanctions against Iran was going to be bearish because it would lead to new supply hitting an already saturated market. Some traders believed that the cold weather hitting the U.S. would be bullish news for heating oil and thus, good news for crude oil

Besides these two events, investors also expressed concerns about a possible meeting between OPEC and Non-OPEC countries. This news could turn into a bullish story if there is an agreement to cut production. However, there were rumors out there that Russia was not expected to go along with the program. These rumors were denied and a new rumor began that Russia would go along with a plan.

The U.S. Energy Information Administration said this week that U.S. crude stocks soared to the highest level on record during the week-ending January 22, 2016. Gasoline stocks increased and distillate inventories fell.

If you prefer to compare the EIA figures with the American Petroleum Institute's supply number then you will see that the EIA numbers showed a less bearish picture than the API data releases on January 27.

The point is that the price action on the daily and weekly charts suggests a severely oversold market that is ripe for profit-taking and short-covering. In my opinion, short-sellers are using all of these news stories as reasons to book profits after the prolonged move down.

If you trade the markets long enough, you will run into the same problems facing several commodity funds at this time. We all know that the 'trend is you friend", however, the intraday and short-term price action indicates there may be aggressive counter-trend buyers coming in to protect the market from future downward price action.

Sometimes you have to overrule your technical trend indicator and say "what reliable counter-trend signal can form that will get me out of my winning position before the small speculators realize the momentum has shifted to the upside and that all of their short-term profits have disappeared?"

This is what may be happening in the crude oil market now. The small specs may be caught up in the bearish big picture news while telling themselves that 'the trend is my friend" and "I will not override my short-signal even though the market has retraced about 18% percent from last week's bottom."

In summary, I am starting to see signs of a shift in sentiment to up. I'm not sure what the catalyst is, however, I do know from experience that crude oil doesn't rally until something occurs that has a direct effect on supply. This time, it's not going to be a pipeline blowing up, or a strike at a refinery. It's going to have to be something major like an emergency meeting to discuss a production agreement between OPEC and Non-OPEC countries. This may be the reason why the bears have stopped selling and the market is responding positively to the short-term and intra-day breaks. 

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Technically, the main trend may be down on the weekly chart, but last week's potentially bullish closing price reversal bottom at $27.56 may have been the first sign of a shift in momentum or investor sentiment to the upside since late August.

The bottom occurred after a break to the steep side of a downtrending angle failed to attract fresh short-sellers. The subsequent rally drove the market back over to the strong side of the angle which producing the closing price reversal bottom. This angle comes in t $24.70 the week-ending February 5.

With the March Crude Oil contract currently trading at $34.15, it is safe to say that it will open up next week on the strong side of the downtrending angle at $24.70.

During the week-ending January 28, the closing price reversal bottom chart pattern was confirmed when buyers took out $32.35. A sustained move over this level will signal the buying is getting stronger.

A confirmed closing price reversal bottom often leads to the start of a 2 to 3 week rally. That's the time analysis. The price analysis says that if we get a shift in momentum to up over the next 2 to 3 weeks then we could see a rally into $37.70 and $39.13 over the near-term.

A combination of fundamental and technical analysis suggest a perfect storm may be brewing for a bullish breakout to the upside. Technically, the closing price reversal bottom formed the week-ending January 22 at $27.56 was the first sign that the buying could be greater than the selling at current price levels.

If you believe that the technicals precede the fundamentals then as long as crude oil holds the $27.56 reversal bottom then all we have to do is wait for a news event to either confirm the bullish chart pattern or negate it.