February crude oil futures sold off sharply the week-ending January 2. The selling pressure drove the market through a December bottom at $96.52, turning the main trend to down on the daily chart.
The selling pressure started last week at $100.75 when the market found resistance at a Fibonacci retracement level at $100.83. It then accelerated to the downside when the 50% level failed at $99.16. This put the market in a position to break further. The retracement zone at $99.16 to $100.75 was based on the break from the August top at $106.22 to the November bottom at $92.10.
A new short-term range has developed between $92.10 and $100.75. This creates a new retracement zone at $96.43 to $95.40. This is the next likely downside target. If the trend is doing to turn on the weekly chart, it will start inside this zone. If fresh buyers fail to show then the clearly established long-term downtrend should continue with another test of $92.10 a strong possibility.
Guiding the market lower are the downtrending angles from the $106.22 top. Above the price action, acting like resistance is an angle at $101.72 this week and $101.47 next week. Breaking below an angle at $97.22 this week and $96.72 the week-ending January 10 will put the market in an even weaker position.
Crude oil opened in a weak position this week when it failed to hold a steep uptrending angle. This triggered the break into another angle at $97.10. A close under this angle will put the market in a weak position the week-ending January 10 and could trigger an even further break into $95.10 or $93.60.
Fundamentally, it appears that the one-month rally is over. This move was triggered by year-end tax assessment selling. U.S. crude oil inventories may have fallen for four straight but the majority of the selling pressure was coming from Gulf Coast refineries reducing inventory before the end of the year. Some states levy taxes on refineries based on their storage supplies at the end of the year.
During the four-week rally, some speculators were fooled into believing that the strengthening economy was behind the drop in inventory. This doesn’t appear to be the case. Even with the drawdown in supply, the new year will begin with ample supply.
The news of the Fed tapering could pressure prices further if the U.S. Dollar continues to gain strength. A rising dollar will make crude oil more expensive for foreign buyers, thereby, lowering demand. Conflicts in Libya and Sudan have led to some supply disruptions but not enough to sustain a rally.
With the end of the year tax incentive selling over, traders will be encouraged to go back to basic supply/demand analysis. Since supply is high, the way of least resistance is to the downside. The tone of the market over the near-term will be determined by how the market reacts to the retracement zone at $96.43 to $95.40.
Because of the series of lower tops, one has to conclude that there is a strong bias to the downside so bearish short-sellers with make every attempt to drive this market through the retracement zone in order to trigger an eventual move to the last main bottom at $92.10.