December Crude Oil continued its downslide on Tuesday due to demand concerns and growing inventories in the U.S.  Since breaking Fibonacci support at 76.45 on August 19, crude oil has dropped over $3.00 per barrel to the July 6 bottom at 73.15. If downside momentum continues, the market should test the May 25 bottom at 71.50 shortly.

The slowdown in the U.S. economy has forced many analysts to cut their demand outlook over the short-term. China is also cutting back a little. With the world’s two largest economys demanding less crude oil, the market really has no place to go but down.

With the end of driving season right around the corner, U.S. inventories are expected to continue to increase.

Technically, the trend is down, but the market is nearing two key bottoms at 73.15 and 71.50. With the market down 14 days since the top at 84.45, trader should be careful not to aggressively short this market in the hole due to the threat of a possible short-covering rally. Oversold conditions make this market ripe for a closing price reversal bottom especially if Wednesday’s Energy Dept. inventories report comes out better than expected.

Traders should also watch the weather for possible disruptions in the oil supply. The threat of a hurricane may lead to a refinery shutdown. This type of news has been known to cause a short-covering spike in oil prices.

Stock Index futures are relatively quiet overnight and the outlook is for a slightly lower opening, nonetheless, last night’s close has the indices on a seven-week low and in a position to work lower.

Lower yields in debt markets continue to tell investors to buy Treasurys. The Fed told us a couple of weeks ago to buy Treasury Bonds. Japan and large institutions have been buying Treasury Bonds. All of these transactions are telling us to be conservative.

Overnight traders are taking a cautious approach ahead of the Durable Goods and New Home Sales Reports. Tuesday’s worse than expected U.S. Existing Home Sales hit the equity markets hard as it served as strong evidence that the economy was cooling off.

Economists are estimating new home sales in July to be 330,000. Any data that is weaker than expected will weigh on market sentiment. This means that the prevailing asset allocation strategy will continue with investors shedding risky assets in favor of the protection of the Treasury markets.

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