July crude oil surged last week after finding support slightly below a 50% price level at $91.26. The powerful move to the upside has put the market within striking distance of a downtrend line at $97.13. A move through this level will put the market on the bullish side of a triangle chart pattern that has been holding the market range bound for almost a year.
Besides the downtrend line, three tops at $97.38, $98.22 and $99.77 have proven to be formidable resistance. Sustained moves through these levels will indicate a serious shift in investor sentiment. If speculators believe the oversupply situation move is overblown then look for them to take the market higher since it is generally accepted among chart watchers that the “technicals precede the fundamentals. “
Another failure in the upper level of the triangle formation will mean the formation of another lower-top. This would suggest another break back to the retracement zone at $91.77 to $90.45. A failure to hold this zone would mean a test of the uptrending support line at $87.03 this week.
Conventional chart pattern analysis has identified the triangle chart pattern as a non-trending pattern. However, this chart pattern has been known to predict impending volatility. Therefore, investors should watch for a potential breakout over $97.13 this week with increased volatility accompanied by rising volume.
Fundamentally, speculators could’ve asked for better conditions for a breakout to the upside. The U.S. Dollar is down, making crude oil more appealing to foreign investors. Additionally, last week’s inventory report featured a big drop in U.S. oil supplies.
Besides the drop in oil supplies, crude oil received a boost on Thursday, June 6 when the Labor Department reported that the number of Americans seeking unemployment benefits fell 11,000 last week to a seasonally adjusted 346,000. This could set the tone for a bullish U.S. Non-Farm Payroll report on Friday, June 7.
Despite this potentially bullish outlook, many traders are downplaying this week’s news because supply remains ample given the lackluster global demand. If the latest U.S. jobs data report confirms a sluggish economy then look for crude oil to reverse this week’s strength and head back towards the middle of the range.
The forecast this week is dependent upon the jobs report and the possibility the Fed will begin tapering its aggressive asset purchasing program. If the jobs data is bad, then look for the outlook for the economy to remain sluggish. This would likely mean lower demand and higher supply at least over the short-run.