Energy commodities traded lower on Friday due to a weaker than expected print from US Non-Farm Payroll. However, price managed to stabilize around 109.0, trading just under and above it due to natural volatility until the end of Friday’s session. Early Monday was actually bullish for Oil despite Asian stocks trading lower due to US stocks’ influences. Brent Crude pushed to 109.50 USD per barrel on hopes that Chinese economy is getting better thanks to a decent HSBC Service PMI print.
If you do not think that this is a convincing reason why Oil should rally, you are probably right. It is highly unlikely that a growth in Chinese service sector has any significant impact on Oil, as it is the manufacturing sector (which is shrinking) that holds the lion share of energy commodities demand. In any case, it seems that the rally early today could be a simple case of residual bullish sentiment from FOMC Wednesday, in which the Fed maintained their commitment to continue current QE3 program. This is not a far-fetched assertion considering that bullish sentiment from FOMC announcement allowed price to ignore the surprising +431K increase of crude inventory based on DOE numbers, when expectations were calling for a decline of -2.4 million barrels – meaning that implied demand for Oil has fallen. Given that sentiment trumps fundamentals not too long ago, it is reasonable to assume that the case is similar this morning.
Things took a bearish turn when reports of renewed US-Iran nuclear talks entered the wires, suggesting an improvement in the political stalemate of Middle East which has driven prices higher a few months ago. Again, if one would be wholly justified if he/she think that this may not be a strong reason why prices shed more than 1 USD per barrel in 2 hours, as the talks have barely taken place and may only rear its head later in the week. Just as how the move higher from 106.5 – above 110 on Thursday was based on speculation, it is likely that technical speculation may be the bigger driver here. Price has failed to break Senkou Span A (Kumo Top) after trying to do so for an extended period of time, and the failure to break the 109.50 resistance confluence proved to be too much for speculative bulls, resulting in hyper-sensitive traders already looking to clear their long positions to begin with. Imagine a long trader already concerned that price is going nowhere, suddenly hearing the US-Iran news; hence it is not surprising to see such a strong selling action happening right now.
The bulls are not simply lying down though, with price rebuffing a potential bearish Kumo breakout, sending the hourly candle to close back within the Kumo. However, the odds are stacked against the bulls right now with Stoch readings suggesting a bearish cycle and forward Kumo showing a bearish Kumo twist. Furthermore, the flat Senkou Span B has a tendency to attract price towards it, which makes bulls’ job to pull away higher that much harder. The only thing going for bulls right now would be the overarching bullish sentiment. Even if price break below Senkou Span B, 108.0 is still the preferred support to break to invalidate current rally from 106.5. A break of 108.0 would also result in the formation of a Head and Shoulders pattern which will open the door for a move back to 106.5 and potentially beyond.
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