The technical picture for January Crude Oil futures turned gloomy during this holiday week. After three weeks of consolidation, the inability to garner enough upside momentum to drive the market higher, finally forced counter-trend investors to give up hopes of a breakout rally, driving the market to a level not seen since June. Unless there is short-covering rally on Friday, November 29, it looks as if the market is going to close at or near its low for the week, setting up crude oil for further downside pressure next week.
Technically, the weekly chart pattern couldn’t be clearer. Key resistance remains a downtrending line from the $107.94 top, moving at a pace of $1.00 per week. This angle comes in at $94.94 this week and $93.94 the next. A Fibonacci retracement zone at $94.12 is also a resistance level. This creates potential resistance clusters at $94.12 to $94.94 and $93.94 and $94.12.
Not only did the market take out the former low at $93.17, but it also took out trend line support. This is a sign of weakness. This week, the angle comes in at $93.58. Next week at $93.83. With the angle moving away from the price action, it is going to take a tremendous shift in momentum to put the market back on the bullish side of the equation.
The weekly chart indicates there is plenty of room to the downside. If one looks to the left, one can see a pair of bottoms at $90.40 and $90.35 that could be potential downside targets. These levels are followed by uptrending support angles from the $85.58 bottom at $89.58 and $89.71. Oversold conditions on the daily chart could trigger short-covering rallies if these areas are tested successfully.
Fundamentally, the market was being held up by the widening Brent/crude oil spread. The spread was increasing due to the failure of Iran to reach a deal on limiting its nuclear program with the U.S. and five other major countries. We had been warning over the past two weeks that because of the bearish supply and demand situation, the main downtrend was likely to continue once this spread collapsed back to normal. This was the situation investors faced this week.
Last week-end a limited deal was reached with Iran and the spread lost its support so the break was not a surprise. Sure, there is going to be a debate about the strength of the agreement, but the bottom line is, traders are going to set it aside and return to the basic supply/demand fundamentals for direction. And the picture remains bearish.
Over the next week, there may be some concerns expressed about the timing of the Fed’s plan to begin reducing its monetary stimulus program, but unless there is a sustained increase in demand, it looks as if the crude oil market is headed towards the $90.00 area.