Crude oil prices ended lower for the abbreviated Thanksgiving week as the action early on fell just shy of the weekly downtrend line at the $80.00 level generating technical selling while fears of rising inventories exacerbated the move that drove prices to a key Support point at $75.50. Trading stabilized mid-week just ahead of the holiday on position squaring while the DOE reported inventories rose less than analysts had predicted.
The big blow to oil prices last week came from the Dubai debt crisis as the government investment company, Dubai World, sought to delay repayments of its $59 billion of liability. Following the news, equities tumbled and the dollar climbed sending crude oil plummeting to a 7-week low at $72.39 while reviving fears over the sustainabilty of the economic recovery.
With light volume on Friday and the end of the month near, oil prices were able to recover some losses of the over-extended sell off to close at $76.05 with a week-on-week loss of 1.8%.
There has definitely been a shift in sentiment in the oil market due to both fundamental and technical factors. Fundamentally, inventories remain high and demand remains weak making it difficult to justify further rising prices. During the rise to $82.00, investors had been ingnoring the fundamentals and instead playing off of the weak dollar as it bolstered the appeal for commodities across the board. However, as the latest blow from Dubai rocks confidence in the financial markets, it’s a safe bet that investors will be closely watching the fundamentals in the comings weeks and months.
TECHNICAL OUTLOOK
The market has been gradually trending down for six weeks since posting a yearly high at $82.00 in October while capping advances in recent weeks at the key $80.00 resistance level. Additionally, an 8-week uptrend line was violated after the rejection at $80.00. As a new month begins on Tuesday, two new key monthly trend lines come into play this week. First we have the 11-month uptrend line which, based on current levels, is set to be violated as it crosses at $76.70. Second is the new 6-month uptrend line which crosses at $74.75 and adds to the key $75.50 to 75.00 key Support range.
With the recent trend down, a broken 8-week uptrend line, and prices opening this week below the 11-month uptrend line, we have the conditions in place for a ‘sell rallies’ start to the week. Initial weekly Resistance will be set at $76.70 to 78.00. Failures to trade or settle the market above $78.00 this week will reinforce weakness and target the key $75.50 to 74.75 Support floor. Despite last week’s plunge to $72.39, the $75.50 to 74.75 Support range remains an important threshold to break. Trade or settlements below $74.75 this week will pave the way to re-visit the next crucial support target at $73.00 to 72.00 consisting of the 3-quarter uptrend line, last week’s low, and the bottom of the current 7-week downtrend. That being said, if this scenario plays out, sellers should be scaling out of positions there. A close on the week below $72.00 makes $70.00 to 68.00 a definite possibility in the forseeable future.
On the upside this week, if the Bulls can fend off selling at the key $75.50 to 74.75 Support base, solid buying opportunities will arise for a short covering reversal targeting the $76.70 to 78.00 weekly Resistance zone. Steady trading or daily settlements above the $78.00 level will mark a key upside breakout this week with an objective to challenge the 7-week downtrend line now at $79.50 up to last week’s $79.92 high and a new 3-month downtrend line at the crucial $80.00 mark. Trade above $80.00 either intra-day or on a closing basis is very bullish on the market with a highly probable chance of reaching the 2009 year high at $82.00 while setting up a potential path toward $85.00 in the week’s ahead leading up to 2010.
