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Talking Points:
- Crude Oil Technical Strategy: Buying Dips Above 200-DMA, Targeting $46.77/bbl
- US DOLLAR weakness now in question as Commodity FX sees Volatility
- Sentimental Trading System Warns of Further Strength
The month of May doesn’t appear to be providing the bullish support for WTI Crude Oil that prior months have. At least, this hasn’t played out within the opening range or first week of trading in May. A strong US Dollar and weak global risk sentiment picture have caused concerns that the imbalance from supply, albeit contracting supply, and demand will remain unreasonably wide favoring lower price.
As markets await non-farm payrolls on Friday, a few news developments provided a strong bid in WTI & Brent Oil (CFD: USOil & UKOil Respectively). First, news of a devastating wildfire in Alberta’s Oil Sands Area in Canada has led to the evacuation of the entire population just under 100k. Naturally, output has disrupted reducing supply by an estimated 1m bpd+ according to data published in Alberta’s Spring Oil Sands Quarterly.
Additionally, developments in Libya and Iran have caught the attention of traders, and if nothing else, may provide enough fear to have short-sellers sit on the sideline until clarity reigns again. In Libya, escalating tensions may cause production output to fall by ~120k bpd if the National Oil Corporation (NOC), set up by the rival Eastern government, continues to block tankers.
Lastly, Iran has noted that they are quickly reaching pre-sanction levels in production and market share already. Those fearful of a supply glut are seeing this as positive for a potential coordinated supply balance sanction by OPEC members. This morning, the following headline flashed: "IRAN READY FOR JOINT ACTION W/ OPEC AFTER PRE-SANCTION MARKET SHARE".
On Thursday, US Oil (June Contract expiring May 19) peaked at 46.00 (so far) during early NY trading.
A Pull-Back Shouldn’t Concern Bulls. The H4 Ichimoku Cloud & 200DMA Will Be Firm Support
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The above chart is a medium-term price channel via Andrew’s Pitchfork tool with sliding parallels drawn with the slope of the median line off of key pivots. The lower handle is drawn off the February 11 low at 26.03. You’ll notice on the bottom-left of the chart; the sliding parallels have acted as key pivot support zones into Q2. Now that we have seen a break above the 200-DMA (currently near $40/bbl), our focus turns higher to the upper median line around $47.50.
Key Support & Resistance Levels from Here (Visual Map Below)
The Support Zone in focus after Thursday’s blast-off is the Wednesday low at $43.20. Wednesday's low is above the next level of support by ~$0.70 barrel at $42.48, which is the April 26 low that printed before pushing up to $46.75 to close the month. Below $42.48, there could be a quick drop to the 200-DMA, which would take a strong move lower down to ~$40/bbl. Given the significance of the Intermarket factors that have shifted since Oil broke above $40/ 200-DMA, only a move below there would change my bullish model.
Given the macro environment, I’m staying bullish for now, and the April high is the next resistance level in focus at $46.75/bl. Beyond there, the Weekly R1 & R2 pivot at $46.77 & $49.35 respectively may soon be tested.
Contrarian System Warns of Further Upside
In addition to the technical focus around Andrew’s Pitchfork, the sliding parallels, and the Intermarket relationship of the US Dollar, we should keep an eye on retail sentiment, which could be warning of more upside price action. Further upside is aligned with our Speculative Sentiment Index or SSI.
According to client positions at FXCM, the ratio of long to short positions in the US Oil stands at -2.46 as 29% of traders are long. Long positions are 32.1% below levels seen last week. Short positions are 3.9% higher than yesterday and 22.4% below levels seen last week. We use our SSI as a contrarian indicator to price action, and the fact that the majority of traders are short gives a signal that the WTI Crude Oil may continue higher. If the trading crowd grows further net-short, we could be in the works of an upside extension taking us closer to $50/bbl.
Key Levels Over the Next 48-hrs As of Thursday, May 5, 2016
T.Y.
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