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Talking Points:
- Crude Oil Technical Strategy: Oil Failing To Push Past First Key Resistance Zone at $34.25/bbl
- Strong US Dollar Further Puts Strain On Oil’s Advance Alongside China’s Contractions
- WTI Continues To Lead Risk Sentiment, Watch for Equities to Fall Should Oil Head Back Below $30
Rocky Start to the Week for Oil
The price of WTI Crude Oil has fallen early in the trading week by more than $1/bbl after investor’s optimism was tempered by Chinese manufacturing numbers that showed the second largest economy in the world, and the recent key driver in commodity demand showed its lowest reading in 3-years. On top of the Chinese data, that disappointment many, the news and hopes of a coordinated production cut by Saudi, Russia, and other producers are unwinding.
In addition, it would be wise not to underestimate how quick some investors are to book a large gain like the one Oil has seen recently. If profit booking and disappointment economic data align, alongside no production cuts, it is difficult to get hopes up that we see a sustained rally above the YTD high of $38.36 on the first trading day of the year.
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Key Levels from Here
Last note, we shared that the sharp move above $34/bbl would likely lead to unstable price action. Given today’s sharp move low of +4%, another key level worth watching is the key higher low on the chart of 29.23. The March contract pivots off that level before hitting $34.79, and if Bullish momentum is to remain at all, that price should hold as well. Some have claimed that the late January move was little more than a ‘dead cat bounce,’ this week should help resolve that issue, and we will keep an eye on last week’s high and the YTD high of $38.36 to validate the Bears view.
Sentiment Flip Warns of Further Short-Term Upside
In addition to the fundamental and technical pressure that Oil still has on its back, the bearish view aligns with our Speculative Sentiment Index or SSI. Our internal readings of Oil are showing an SSI reading of 1.2096. We use our SSI as a contrarian indicator to price action, and the fact that the majority of traders are now bullish provides a signal that US Oil may continue lower, and attempt to break the support levels mentioned above. If the reading were to turn negative again, and price broke back above $34.78bbl, we could begin looking for a retest of the YTD high of $38.36.
Sentiment extremes unwinding look to be the likely reason for the aggressive rally and recent volatility starting late last week as Oil bears took their profitable trades off the table. However, now the short-term Oil Bulls could be taking their profits as well, especially since the fundamental picture has not become much rosier since the 20%+ rally ended.
T.Y.
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