August crude oil continued its sharp rally which began two weeks ago when the market successfully held a major pivot zone at $94.32 to $93.13. The upside momentum generated by the move triggered a strong rally, boosted by a breakout through the downtrending resistance line of a triangle chart pattern.
After taking out a pair of tops at $97.46 and $97.94, the market continued higher until it met selling pressure, slightly below the high for the year at $99.98.
The initial phase of the rally was fueled by speculators betting on an escalation of the conflict between the Syrian government and the rebels. Bullish traders were taking long positions in anticipation of a possible disruption in supply. The potential for increased turmoil in the region is likely to underpin the market, but unless something more dramatic occurs, the market may just settle into a range.
On Wednesday, June 19, the U.S. Federal Reserve announced in its policy statement that it was going to continue to fund its $85 billion per month bond-buying stimulus program. This would’ve have been supportive, however, in his news conference, Fed Chairman Ben Bernanke added that the central bank could begin tapering the buying if economic conditions improve enough to warrant such a change.
This comment triggered a sharp rise in U.S. interest rates, driving up demand for the U.S. Dollar. Since crude oil is priced in dollars, speculators sold it as they anticipate a drop in demand from foreign traders. With oversupply already a concern, traders are going to continue to press the short side of the market because of the simple supply/demand fundamentals, however, there may be attempts to spike it higher if conditions in the Middle East cause supply issues.
Based on Thursday’s sharp sell-off, the August crude oil contract is in a position to post a weekly closing price reversal top. This came as no surprise because of technically overbought conditions and the action by the Fed. A continuation of this move next week however, will be a sign that short-sellers are once again taking control. Technically, crossing over to the weak side of a long-term pivot at $94.32 will send a signal to traders that further down side action is likely.