The commodity bulls took a breather yesterday as corrected recent big moves.The correction set up some good buying opportunities today; that’s what I was getting at with all the “momentum buy days” I had in this morning’s watch list.Let’s look at crude oil futures; it was a good example of what I saw.
Below is the daily chart of July Crude Oil futures.Crude has been on a tear the last month, rallying 40% from its late April low. This week, Monday was a breakout setup bar; it was had the narrowest range of the previous four days.This range contraction meant we were looking for a breakout, directional move for Tuesday.This was, in fact, what we got, as crude oil fell $2.40 from Monday’s close.
There were two reasons I expected a rally today.First, there is a strong tendency for a breakout trade to reverse and go in the opposite direction the following day, meaning Monday’s selloff was likely to be followed by a rally today.Secondly, as the arrow in the chart points to, momentum moved down to a buy day level. I use two period momentum for this; extreme lows in momentum indicate a buy day is likely to occur in the following session.On a momentum buy day we expect the market to open near the lows of the session, rally during the session, and close near the high.This is certainly what we’ve seen thus far in crude today.
I added Fibonacci retracement levels from Monday’s high to Tuesday’s low for price levels to look for as resistance and price targets for a rally.The 50% retracement level at 67.00 was the key level, and taking out the 61.8% retracement level at 67.48 made a retest of the recent high at 69.05 likely.
What do we see for tomorrow?A close above the 2009 high of 69.05 would be bullish, and momentum is not yet high enough to give a short sale signal.On the fundamental side, the US NFP report for May could give clues as to demand, so some caution might be in order.
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