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Crude Oil Looks Vulnerable

Commodities / Crude Oil Jun 25, 2010 - 04:52 AM GMT

By: Seven_Days_Ahead

Commodities

Best Financial Markets Analysis ArticleWe have remained sidelined in Oil for quite some time now as we judged the market lacked long-term direction. Although a recovery began after the steep sell-off in May, we decided the subsequent rally was probably a correction rather than a resumption of the previous bull trend.


The Technical Trader’s view:


MONTHLY CONT. CHART

The market is caught between the 50% Fibonacci retracement resistance at $90.28 of the pull back to the $40 level in 2008.

And the support from the 38.2% Fibonacci retracement support at $66.71….

BUT note the monthly Key Reversal of last month.

There has been no reaction to that so far, but we think it may yet….

Smashing down through the $66.71 support

 

DAILY SEP 10 CHART

This suggests the monthly bear possibilities may be close to fruition.

Note the rally from the lows at the end of May failed at the Prior Low resistance $80.36.

Note too, that the prior Lows 77.56/86 offered no support to the bulls yesterday.

And looking wider, see that a bear Rising Wedge is close to the point of completion.

Watch the lower diagonal tomorrow at $73.83 or so which is coincident with the Fibonacci support, adding to its importance if broken.

The Macro Trader’s view:

The May 2010 sell off was driven primarily by a spike in risk aversion caused by what became the Euro zone Sovereign debt crisis. As traders began to fear a sovereign default all risky assets were dumped in favour of safe haven trades such as government bonds, the Dollar and Yen.

They reasoned that if a government of a developed economy defaulted the repercussions would be far and wide with growth a likely casualty. But even when the Euro zone finally launched its safety fund worth US$1.0T traders were not re-assured. Only when the budget austerity measures were adopted by virtually all Euro zone economies, including Germany and more recently France, did markets breathe a sigh of relief. The resultant rally in equity markets marked a drop in risk aversion and traders began to buy back into oil too.

But a collateral risk of the rush to fiscal consolidation is a growth pause or worse, a dip back into recession. Equity markets have begun to take this risk seriously and are once again looking vulnerable. The Oil market too is struggling for direction.

The oil price already looked extended to us before the sell off when confidence in the recovery was reasonably high. We thought the recovery was initially unlikely to be as robust as in previous recovery cycles and the overhang of oil supply that had built up during the economic downturn would take time to work off, meaning supply was likely to outstrip demand.

But now with traders worrying about the outlook for the Euro zone economic recovery, where will the extra demand needed to push the oil price higher come from?

Moreover, a big question mark has once again arisen over the US economic recovery. Traders were already nervous after recently weak non-farm payroll and retail sales. But housing market data released over the last two weeks has solidified those worries.

This week has seen the release of much weaker than expected Existing and New home Sales. It is now perfectly clear that the housing market was only being propped up by tax breaks which have now expired. If the strength of the US economic recovery is now in doubt, what then of the oil price?

For the oil market to test the highs, we judge fresh new evidence is required, showing the global economy is expanding faster than is currently the case, and we don’t think it will be forthcoming, at least in the short/medium term, so our attention has turned to downside trading opportunities in oil.

Mark Sturdy
John Lewis

Seven Days Ahead
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Mark Sturdy, John Lewis & Philip Allwright, write exclusively for Seven Days Ahead a regulated financial advisor selling professional-level technical and macro analysis and high-performing trade recommendations with detailed risk control for banks, hedge funds, and expert private investors around the world. Check out our subscriptions.

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Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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