After crude’s swift descent and subsequent breach of my 42.75 target during Tuesday’s 10am hour – 9am, 10am and 2pm are truly magical hours for oil traders, I commented that I would watch for signs of a reversal and likely stay short up until the API print.
Around 10:30am, we saw a spike lower in crude followed by a powerful reversal. I opted not to trade. Yesterday’s close below 44.00 and my neutral zone (44.16-43.76) cemented my call for a new leg lower and it was too early in this new leg to start scalping. Moreover, the bounce off of the ~42.60 lows was violent and given the 43 strike, so too was the evaporation of the position’s gains. For the rest of the day we saw oil retrace lower along with /ES. The NYMEX ramp moved oil higher but still below the morning spike’s high. While crude also moved higher on the API build (+4.1mm vs. DOE expected: +3.560), it stalled below the 50% retracement from late August’s run higher, and below the bearish trendline from October’s highs. Moreover, December /CL futures volume following the API release was only 3,626 contracts, lower than the prior two reports (4,488 and 7,767) and not significant enough, on it’s own to glean strong sentiment.
BABA’s stronger than expected sales data coupled with APPL’s steady Chinese figures dispel fears of an imminent Chinese hard landing. This positive sentiment might filter through to commodity prices, so use the bearish trendline from October highs and the 50% retracement of August’s run higher at ~43.50 as a support level. Tuesday morning’s price action revealed strong resistance at ~42.70. I expect oil to move through this level and continue it’s downward move targeting 42.15.
As an FYI: the last two FOMC statements have been more dovish than expected and we’ve seen oil move lower due to growth concerns. I expect the Fed’s statement to be a bit more hawkish than market participants seem to expect, in an effort to keep hopes for a December hike still alive. Watch what the Fed emphasizes as justification for the potential for hikes. Positive mentions of China could give crude a bid, while a truly dovish statement could pave the way lower for oil.