On Wednesday, the Fed left its USD85 billion-a-month asset purchase program in place following its monthly policy meeting and gave no clear indication whether it would start scaling back stimulus at the December meeting or continue it into the start of 2014. However, investors still look out for U.S. data reports recently to gauge if they will strengthen or weaken the case for the Fed to reduce its bond purchases.
Yesterday, the U.S. Department of Labor said that the number of individuals filing for initial jobless benefits declined by 10,000 to a seasonally adjusted 340,000 last week. Meanwhile, analysts had expected U.S. jobless claims to fall by 11,000 to 350,000 last week from the previous week’s total of 350,000. Additionally, the Chicago manufacturing purchasing managers’ index jumped to 65.9 in October from 55.7 in September. Analysts had expected the index to decline to 55.0 this month.
Please note that expectations that the Fed might start curbing its bond purchases by the end of this year had fueled declines in the prices of riskier assets before investor focus shifted to the wobbly fiscal situation in Washington from late September. Therefore, yesterday’s (stronger than expected) data raised speculation that the Fed may start tapering stimulus sooner than expected and pushed crude oil lower.
Having discussed the above, let’s move on to the technical changes in the crude oil market (charts courtesy of http://stockcharts.com).
Looking at the above chart we see that the situation deteriorated once again. Although, after the open oil bulls manage to push the price higher, it only reached the previously-broken lower border of the declining trend channel. This strong resistance successfully stopped further growths and crude declined in the following hours to its daily low of $96.03 – slightly above the October low.
Quoting our previous Oil Trading Alert:
(…) If the buyers manage to hold this level, we will likely see a pullback to the 200-day moving average. However, if it is broken, we may see further declines to at least $95. Please note that in this area is the lower border of the declining trend channel in terms of daily closing prices. This line successfully stopped the recent corrective move, as seen on the chart.
Before we summarize, let’s move on to the XOI daily chart.
Yesterday, after the market’s open, the oil stock index climbed to its daily high at 1,477, however, this improvement was only temporary. In the following hours the XOI declined below the previously-broken 78.6% Fibonacci retracement level (close to 1,467) based on the entire May-October 2008 decline and closed the day below this level. In this way, the breakout above this important resistance was invalidated. This is a bearish sign, which may lead to further deterioration – especially when we factor in the RSI indicator.
Quoting our previous Oil Trading Alert:
(…) we should keep in mind that the RSI bounced off the 70 level, which is a bearish sign. Therefore, we may see a corrective move in the following days. Please note that we saw similar price action several times in the previous months (marked with red arrows on the above chart).
The nearest support level is the bottom of the recent corrective move at 1,441. A further one lies at 1,428-1,430 and it is based on the May and September highs.
Summing up, light crude extended declines and dropped slightly above the October low. Therefore, a test of this important level should not surprise us.
Very short-term outlook: bearish
Short-term outlook: bearish
MT outlook: mixed
LT outlook: bullish
Trading position (short-term): we do not suggest opening short positions yet. As long as crude oil remains above the October low further declines are limited.
Thank you.
Nadia Simmons
Sunshine Profits' Crude Oil Expert
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