The market snapped a 3-week winning streak last week as corrective profit taking kicked in off the psychological 6000 Resistance barrier. Crude prices gained more than 10% in the month of May off the 5000 level in a rally driven by equities markets and consumer optimism, but lacked any fundamental substance. Prices fell late in the week as a correction set in on equities in addition to the fundamental reality of continued weak demand and surplus inventories. The DOE weekly inventory report showed a surprise decline of 4.7 million barrels in crude stockpiles for the week ended May 8, however, the market reacted negatively as the decrease was driven by a slump in imports and not by higher consumption. Among other bearish factors was OPEC’s boost in production for the month of April and the International Energy Agency’s monthly report forecasting that world oil demand will suffer the biggest drop this year since 1981. In the end, crude oil futures posted a weekly loss of 3.9% closing at 5634 a barrel on the New York Mercantile exchange.
To start a new week, overall Monthly trend is up off 5000 level, though weekly and daily trends show reversal patterns that favor the downside for the week hinting at continued corrective trade. Adding to the bear camp this week was a double top pattern at 6000 coupled by a ‘bearish harami’ reversal pattern on the weekly chart. That being said, traders can look for multiple correction days using a ‘sell rallies’ approach early on against this week’s initial resistance at 5750 to 5900 and again at the 2009 Highs at 6000. A test and failure against 6000 will present a Triple top pattern signaling a major turnover with great selling opportunity.
A close or break below the 5600 level will accelerate bear drives to the next weekly support target range at the prior 2009 breakout high at 5466 down to 5350. Producing daily settlements below 5350 this week will open the flood gates for a flush to the 5000 to 4900 Monthly Bull trend line.
For the upside scenario, if corrective dips hold and settle above 5600 we can expect the Bulls to maintain the edge with a initial test of 5750 to 5900 weekly resistance. Closes above 5900 will fuel a retest of the 6000 level with the potential of extending to the major bull target at the 11-month downtrend line (11 M v TL) from the 147.27 record high set back in July 2008. Producing a strong close above 6100 will set the stage for further advancement into the 6300-6500 range in the days/week ahead.
