After several days of consolidation, nearby crude oil futures soared, setting up the market for further upside action. The positive reaction is being attributed to bullish comments from European Central Bank President Mario Draghi and greater demand for higher risk assets. Draghi’s comments and a better-than-expected Spanish Bond auction may have helped fuel the breakout rally, but it has been the positive outlook for an improving U.S. economy that has underpinned the crude oil market for several weeks.
Another sign supporting higher prices or at least helping to establish a solid support base is the news that money managers increased net-long positions by 11 percent in the week ended January 1. According to the Commodity Futures Trading Commission’s Commitments of Traders report dated January 4, this increase represented the highest level since October 16.
In addition to the CFTC, according to data from the ICE Futures Europe exchange, money managers in London increased their net long positions to their highest level in nine months.
Conventional chart pattern analysis has determined that the daily nearby crude oil futures contract is currently testing a major retracement zone. Although the main trend is up due to the series of higher-tops and higher-bottoms, the market is nearing a previous top at $94.99 and the Fibonacci price level at $95.54. Although momentum is currently driving the market higher, tests of both of these levels could trigger profit-taking.
The nearby weekly crude oil chart shows that the market is in a position to turn the main trend to up on a breakout through the last main top at $94.99. After reaching a bottom at $84.95 the week-ending November 9, 2012, the market consolidated for several weeks before accelerating to the upside.
Although momentum slowed following the initial test of a 50% price level at $93.52, the strong surge on January 10 was able to penetrate downtrending resistance at $93.58 while crossing to the bullish side of an uptrending line at $93.95. The strength of this rally should trigger a minimum follow-through move to at least $95.54. If upside momentum continues, then traders should look for a possible test of $97.83 over the near-term.
Finally, the last chart to look at is the monthly nearby crude oil futures chart. The series of lower-tops and lower-bottoms indicates that the main trend is down. The main trend will turn up when $102.08 is crossed.
Although the swing chart indicates a downtrend, the fact that the market is trading on the bullish side of a long-term downtrend line is a strong sign that sentiment is shifting to the upside. We’ve seen this action before; therefore it is going to take a sustained move above $95.54 to convince me that traders are going to go after the top at $102.08.
In summary, looking at nearby crude oil from the bottom up, the main trend is up on the daily and getting ready to turn higher on the weekly charts. The support is coming from increased demand for higher risk assets, led primarily by strong support from money managers.
From a technical perspective, the market is currently testing a key retracement zone. Given the fact that strong money is behind the current rally, crude oil is likely to overtake this zone over the near-term. Speculators may curtail the upside action especially if selling pressure is tied to the debate over the raising of the U.S. debt ceiling, however, an improving supply/demand situation should prevent the start of another prolonged down move.
By. James Hyerczyk