There is substantial risk of loss in trading futures and options. Past performance is not indicative of future results On the radar: • Crude is und

thedecarleyperspective

There is substantial risk of loss in trading futures and options.

Past performance is not indicative of future results

On the radar:

• Crude is under pressure, but the selling might not be exhausted

Crude Oil Weekly
Crude Oil COT Chart

Crude Oil Futures

Crude oil futures are a popular target for speculators, especially during times in which Middle Eastern event risk is at large. However, as traders shift focus to other price factors speculative interest often wanes and traders liquidate; under most circumstances this equates to severe selling pressure. We’ve recently witnessed crude oil futures correct to the tune of $10 per barrel, but our technical analysis suggests the selling has yet to be exhausted. Accordingly, the best strategy from here might be to look for rallies to consider bearish plays.

The CFTC (Commodity Futures Trading Commission) compiles data and issues a report on the net open positions of commodity traders. Within the report, known as the Commitments of Traders, or simply the COT, they identify traders as being net long or short while categorizing market participants into three primary categories; large speculators, small speculators, and commercial hedgers. The large speculator group is comprised of managed commodity funds and other well capitalized individuals or entities entering positions with speculative purposes. This category is sometimes referred to as the “smart money”; conversely, the small speculative group is harshly referred to as the “dumb money”.

Making money in commodities isn’t as simple as following the so-called “smart money”; after all, they have much deeper pockets than most of us. Nonetheless, the COT Report can be extremely helpful in identifying overcrowded trades. In this case, the COT report released last Friday portrays a picture of a speculative community that remains significantly long the crude oil market despite a correction from over $100 per barrel to about $90. Specifically, at the time of measurement (Tuesday’s close) large speculators were holding nearly 216,000 net long futures contracts. Historically, positions in excess of 200,000 have dramatically increased the odds of fund liquidation. If this occurs, our charts suggest the target could be $80.00 per barrel.

In addition to the possibility of speculative liquidation, the U.S. Dollar Index appears to be holding support as marked by a wedge trend-line near 79.00. Also, the MACD (Moving Average Convergence Divergence) oscillator has turned higher and suggests the greenback could benefit from upward momentum. This should result in a trip to the upper lip of the wedge near 80.20, but a break-through at this level could mean the dollar is off to the races. As we know, a stronger dollar leads to a decline in dollar denominated commodities, such as crude oil. In our opinion, the fundamental focus in the financial markets will likely shift to events in Europe in the short term; if so, any investor reallocation of money should favor the dollar (and indirectly work against the price of crude oil).

When analyzing any market, we like to consult a weekly chart to form an overall bias but we then turn to the daily chart to confirm our assumptions. In the current environment, the weekly and daily crude oil charts are telling a similar story. Specifically, crude oil priced near $90.00 per barrel is on the cusp of what might be a wave of selling similar to what was seen in May, but perhaps not quite as panic driven and volatile. Nonetheless, a trip to $80.00 per barrel could be in the cards. After all, crude oil is a feast or famine market and we’ve yet to see the pain of this sell-off materialize.

A weekly crude oil chart reveals oscillators such as the RSI and the Williams %R are carrying mid-range values with readings of just under 50. This paints a picture of a moderately heavy market that has yet to reach oversold levels and, therefore, could have room to move on the downside. Critical support lies near $88.50, a break and close below this price paves the way for a move to what is projected to be trend-line support near $80.00. Although we are not anticipating it, should prices find a way to hold near-term support in the mid $88’s a rally to $97.00 is possible. However, if seen, this price could be a good place to be a bear. Conversely, if we are dead wrong on our bearish bias in crude oil the bulls will likely target $106.50, which is resistance marked by the upper level of the current trading wedge.

Confirmation of our technical analysis can be found in the daily chart. Although there are never any guarantees in trading, success is all about putting the odds in your favor and corroborative evidence between the two time frames tends to do just that. Daily crude oil prices have formed a sharp descending wedge, which is typically viewed as a continuation pattern. Wedge support lies near $88.00, which isn’t far from weekly chart support. Additionally, the MACD calculated with daily price bars is decisively bearish to leave the overall path of least resistance pointing lower. With that said, daily measures are slightly oversold and with strong support looming we can’t rule out a temporary bounce prior to a resumption of the selling. If this occurs, resistance should be found near $93.60 (20 day moving average), with $97.00 (200 day moving average) as a possibility but if seen it should be a good opportunity for the bears.

Crude Oil Daily
Dollar Index Futures
Decarleylogofinal

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DeCarley Trading, a Divison of Zaner Group
Twitter:@carleygarner
info@decarleytrading.com
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www.DeCarleyTrading.com
www.CurrencyTradingtheBook.com

Due to time constraints and our fiduciary duty to put clients first, the charts provided in this newsletter may not reflect the current session data.

Seasonality is already factored into current prices, any references to such does not indicate future market action.

There is substantial risk of loss in trading futures and options.

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