After a successful test of a short-term retracement zone at $91.88 to $90.56, August Crude Oil futures appear poised to breakout over a downtrend line that has been providing resistance since early February. The trend line drops in at $96.87 this week. Sustaining a move through this price with rising volume will be a strong sign that speculators are ignoring the immediate fundamentals and instead have chosen to focus on the possibility of greater demand because of an improving economy.
The triangle chart pattern that has contained the price action for several months is known as a non-trending chart pattern. The fact that the market has retraced over the mid-point of the $106.76 to $81.87 range at $94.31 several times is a clear indication that investors lacked clarity and conviction.
At this time, the market is trading on the strong side of the pivot price, indicating that the buying is greater than the selling at current price levels. The fact that the action has been contained inside of the triangle for several months leads one to believe that the market is poised for increased volatility. If the breakout takes place as expected and fresh money follows the move then look for August Crude Oil to begin to pull away from the confining chart pattern.
Technical traders aren’t going to wait for the fundamental news to confirm the rally. They are willing to speculate that new money is going to arrive on the breakout alone. This should generate the momentum the market needs to reach new ground or at least trade at prices not achieved since early 2013.
As the market nears the psychological $100 level, some of the buying power should subside if the hedging pressure overcomes the speculative buying. The reason for this is the hedgers are aware of the current supply/demand situation while the speculators are hoping for improvements in the economy to improve demand so that the supply falls. The speculators are taking on the risk because of too many unknowns while the hedgers just want to keep the market in a range.
One thing on the speculators side is the collapse in the U.S. Dollar. In May, the dollar rose on speculation the Fed would begin tapering its aggressive bond buying program. At first, investors drove up the dollar on the belief that rising interest rates would make the dollar a more attractive investment.
Lately however, investors have been pounding the dollar in the belief that the Fed’s action may devalue the currency. The drop in the dollar has been making crude oil more attractive to foreign investors. This may be the strongest fundamental driving the market higher.
We will know more next week on June 19 when the Fed is set to release its latest policy statement. If it says they are going to begin winding down its stimulus buying and the dollar tanks further, crude oil is likely to spike to the upside.