The market snapped a 4-week win streak last week as the Bears took the reigns after a week long battle for control. Oil prices have experienced sharp swings since hitting a technical peak at the top of the 3-month uptrend channel at $73.23 earlier this month with a variety of factors influencing last week’s volatility and ultimate slide. The Bulls had the upper hand mid-week as the weekly inventory report showed crude stocks decreasing by 3.9 million barrels to 357.7 million in storage. But in the end, a strong dollar and weakness in equities along with position squaring ahead of Monday’s July expiration halted the Bulls efforts sending trade to close the week out below the $70.00 level for the first time 2-weeks basis the Spot contract (July).
As we move into a new week, investors are beginning to turn their focus to the fundamental reality of weakening demand and surplus inventories. The market has surged this year from lows near $34.00 to $73.23 mainly on the speculation that the worst of the recession is over and demand for oil will pick up. However, the EIA reported last Wednesday that demand for petroleum products is in fact down 6.6% from the same period a year ago. This demand card needs to see improvement in order to support the current price levels. The fundamentals are bearish, and as that becomes more apparent, crude oil prices are likely to retreat barring any geopolitcal events.
Technical Outlook-August (Q) Crude Oil
From a technical standpoint, the market rally has paused since peaking at the top of the 3-month uptrend channel earlier this month. The peak was followed by a daily ‘harami’ candlestick reversal pattern and a series of small body candles, a warning sign that prices will struggle to move higher. With that in mind and this week set to break both the 4 and 10-week uptrend channels based on settlement, a bearish tone will be set to start the week off.
The initial weekly Resistance range is placed at $70.50-71.50. The approach this week will be to sell any failures against initial resistance leaving the market vulnerable to corrective trade developing over the course of the week. Maintaining settlements below the $70.00 level will increase the probability of reaching this week’s downside target range at $67.00-65.00. If $65.00 is violated, the Bears will be eyeing $62.00-60.00 later in the week or in the week ahead.
With the July contract expiring on Monday, there is a possibility the target $67.00-65.00 target range will be reached early on. Any signs of pressure subsiding inside this range will offer short term buying opportunities for scalpers with any rally attempts from there expected to be short lived. Otherwise, only trade that can breach the top of weekly resistance at $71.50 will shift control back in favor of the Bulls and target this week’s upper Resistance range at $72.35-73.23. With the top of the 3-month uptrend channel at the 2009 highs at $73.23, the next major upside breakout above there will propel crude oil to the OPEC target price at $75.00 with room to the 38% Fibonnaci retracement level from record highs $76.00. The Fibonnaci retracement levels are widely watched, therefore any longs should consider booking profits between $75.00 and 76.00.