Peaks and Troughs Progression
Light sweet crude oil formed a lower minor low and may form a lower minor high. The intermediate trend is towards lower prices. The crude oil market formed a minor low last week. This could be a good entry level for traders looking to get short crude oil.
Crude oil is trading above the flattening 9 and 18-day simple moving averages: the short-term trend is towards higher prices, however, the signal isn't reliable. The commodity is trading below the flattening 50-day simple moving average: the intermediate trend is towards lower prices, however, the signal isn't reliable. Crude is trading in the middle of the Bollinger bands after bouncing off of the lower band.
The 12-day rate of change is declining, however, the rate of change indictor advanced over the last few days. Crude oil is below where it was 12 days ago and the difference is shrinking. The 14-day slow stochastic indictor is above equilibrium and increasing after reaching the oversold zone below 20. The 14-day RSI is near the equilibrium level after bouncing off of the 30 level.
The non-commercial traders were net long 268,199 contracts of light sweet crude oil on October 9, 2012. The number of longs declined 231 contracts and the number of shorts increased 9,628 contracts compared to the prior week's reading. Investors are becoming less bullish on crude oil, however, investors remain net long the commodity.
Supply and Demand
The International Energy Agency is forecasting higher supplies and declining oil consumption. The 2012 outlook for demand growth was cut 100,000 barrels a day to 700,000 barrels a day.
On Friday, the latest consumer sentiment reading came in better than expected and above the prior reading: the reading of 83.1 is higher than the previous reading of 78.3 and the expectation of a 78.1 reading. Consumer sentiment has improved recently and may be nearing a peak. My expectation is for worse than forecasted economic data in the weeks to come which should act as a short-term catalyst to drive light sweet crude oil prices lower.
Crude Oil Inventories
Crude oil inventories increased by 1.7 million barrels from the previous week, according to the EIA report released last week. Crude oil inventories are above the upper limit of the average range for this time of year. The elevated level of inventories should weigh on the price of crude oil in the coming weeks.
The fundamentals of the crude oil market are reflecting tepid economic growth as inventories are above the upper limit of the average range for this time of year. Further, the IEA cut the demand forecast. The market action in crude oil is reflecting the weak fundamentals. Also, fundamentals may get weaker in the weeks to come. That said, traders should be short the market and investors out of the market.
By. Chris Grosvenor
Members of www.proproptrading.com will get research notes e-mailed to them with the purchase of an annual membership. Research notes will combine the technical and valuation perspectives, initially.
Disclaimer: This article is not meant to establish or continue an investment advisory relationship. Before investing, readers should consult their financial advisor. Christopher Grosvenor does not know your financial situation and ability to bear risk and thus, his opinions may not be suitable for all investors.