After two weeks of consolidation, March crude oil futures surged to the upside, changing the main trend to up on the daily chart, but making a little more than a normal retracement on the weekly chart.
The market will be analyzed by looking at a longer-term range and a short-term range. The long-term range is $104.37 to $91.47. This range forms a retracement zone at $97.92 to $98.44. On January 23, the market closed in a position to test this range. Since the main trend is down on the weekly chart, fresh shorting pressure may re-emerge inside this zone. This will be an attempt to defend the top at $100.79 which is the change in trend level. So far this price action has been normal when compared to previous rallies.
Given that the definition of a downtrend is a series of lower tops and lower bottoms, crude oil will have to break this pattern by taking out a lower top before we can say the trend has changed to up. Even if the trend turns higher, there may not be an immediate rally since the $100 level is considered good resistance. This means the market is likely to go into a sideways mode until a new higher bottom can be formed.
The short-term range is $100.79 to $91.47. On January 23, crude oil closed on the strong side of the retracement zone at $96.13 to $97.23. Holding this area is important because it could provide the support to launch the market into higher price levels. A failure to establish support in this area will mean that strong short-covering merely drove this market a little beyond a normal retracement and that the market is selling up for another drive to the downside.
Besides the retracement zones, resistance angles come in at $98.87 and $101.62. On the downside, support is at $97.47 and $94.47.
Fundamentally, although U.S. crude oil inventories rose more-than-expected last month according to data released by the Energy Information Administration, the falling U.S. Dollar was actually the catalyst behind last week’s rally.
On January 23, the EIA reported that crude oil inventories rose to a seasonally adjusted annual rate of 0.99M barrels from -7.658M in the preceding month. Analysts were looking for inventories to rise to 0.588M barrels last month.
Late last week, China reported poor manufacturing data, signaling that the country’s economy may be slowing. This encouraged investors to move to higher-yielding currencies, pressuring the U.S. Dollar. The drop in the Greenback led to increased demand for the dollar-denominated crude oil.
This trend may not last because this week the U.S. Federal Reserve meets on January 29. It is expected to maintain its plans to taper its monthly stimulus, a move which is supportive for the dollar. If investors are buying crude oil because of a weaker dollar then they are likely to begin selling again if the dollar re-establishes its uptrend.
The chart pattern suggests the market is likely to trade in a range next week between $98.44 and $96.13. Traders will make a decision after the Fed meeting. If tapering is supportive and the dollar rallies, then look for a resumption of the downtrend. All bets are off on the short side if $100.79 is taken out with conviction.