May crude oil futures surged early last week, but the rally stalled when the market reached the lower level of our target zone at $94.44. The actual high was $94.47. This was a sign that technical traders were still in control.
Based on the longer-term range of $99.10 to $89.78, a retracement zone has formed at $94.44 to $95.54. The inability to break through this zone is a strong indication that sellers are still guiding the market. The short-term range at $89.78 to $94.47 has formed a retracement zone at $92.13 to $91.57. Since the attempt to rally failed, the market is likely to retrace back into support where buyers will have to decide to defend it, or let it go to lower levels.
Additional support comes in at $92.78 while resistance moves down to $93.10. Due to conflicting fundamentals, the market may “ping-pong” in a range for a couple of weeks.
Some traders feel that the improving economy should increase demand for crude oil and are willing to support it on the breaks. Others feel, however that the strong U.S. Dollar and uncertainty over the global economy will keep inventories at high levels, and thus draw the attention of short-sellers.
The latest commitment of traders report shows that long speculators are leaving the market. At the same time, short speculators have been increasing their positions. The report also shows that while long commercial traders may have liquidated 9685 long positions, they also exited 17108 short positions. This may be an indication that short commercials are beginning to cover their positions because they anticipate a rally. It may also be the reason behind the surge to $94.47.
If a transition from short-to-long is taking place then this should be reflected in the next commitment of traders report due at the end of the month. We will be looking to see if the commercial traders have turned themselves around from short to long. Until then, expectations are for a sideways trade. Since speculators tend to be on the wrong side of the market, the fact that they have been increasing their short positions almost $10.00 off of the high suggests that the market may be closer to a bottom then a top.