Crude oil prices took a sharp turn last week, coming off of its yearly high at $82.00 and finishing lower for the first time in five weeks. A multitude of factors contributed to the corrective turnover which began with a cease fire in Nigeria’s key oil producing region. The dollar, which the oil rally was mainly linked to, strengthened as it rebounded off of 14-month lows last week while equities also took a corrective turn lower reducing economic optimism. The Department of Energy’s weekly inventory data released on Wednesday showed an increase of 800,000 barrels in crude stocks while gasoline stockpiles jumped an unexpected 1.6 million barrels. Analysts had been expecting a drop of 1 million in gasoline inventories. Earlier, the API reported a drop 3.5 million barrels of crude oil, however, the market’s reaction was weak, indicating that sentiment may be shifting. OPEC’s comments last week that it may raise output at its next meeting also added to the pressure on oil.
The U.S GDP report gave the oil Bulls some hope late in the week spiking prices briefly above $80.00 with the economy expanding 3.5% annualized in the third quarter according to the Commerce Department. Additionally, the Labor Department reported first time jobless claims fell by 1000 in the prior week. However, rallies were cut short off of technical resistance as well as end-of-the-month profit taking kicking in to close out October. The end result was a week on week drop in crude oil prices of $3.50 from $80.50 the prior week to a settlement of $77.00 on Friday. Yet, the market still gained 9% for the month of October.
TECHNICAL OUTLOOK
As we begin a new month and close in on the tail end of 2009, the technical trend for the year is still up with this week beginning both 10-month and 5-month uptrend channels crossing at $72.50 to $71.50 respectively. However, the weekly trend is down for 3-weeks while last week’s action breached the 6-week uptrend channel setting a near term bearish outlook. That being said, the strategy to start the week off will be to sell rallies against initial weekly Resistance at $77.50 to the broken 6-week uptrend line at $78.60. Failures to trade above $78.60 will confirm the broken 6-week uptrend and set an initial profit target below at the 3-week downtrend channel marker at $76.50 to 76.00. Secondary drives below $76.00 will encourage heavy selling with a key profit objective placed at the prior 2009 highs and new weekly/monthly Support from $75.00 to $73.16. Additional weakness will be signaled by multiple settlements below the $75.00 mark increasing the chance to challenge the longer term monthly uptrends at $72.50 to $71.50 with room for slippage to the $70.00 mark.
Upside action this week will need to penetrate the broken 6-week downtrend line at $78.60 to generate a retest of the $80.00 level. The key bullish factor will be to produce settlements above $80.00. If the Bulls are successful in doing so, expect to see the 3-week downtrend channel and 2009 high at $81.15 to $82.00 challenged. Breakout trade this week or settlements above $82.00 will ignite the next Bull blast bringing the $85.00 level into play. Otherwise, on the bullish front, initial testing of the $75.00 to $73.16 range will offer buying opportunities for rebounding scalps as many shorts will be taking profits down there.
