The Week In Review For Crude Oil - September 22nd - 26th, 2014

I've changed the titles to these reviews to simplify and operate under the assumption that everything being discussed forward will be revolving around technical analysis for the most part. I will discuss fundamentals from time-to-time but the technicals are crucial in trading around shorter-term directional themes. 

As we left off last week, we had been looking for two scenarios to unfold. We either broke the recent swing lows and see a continuation lower or we break out of this support area and test the contract roll gap and higher. I also mentioned that these were merely possibilities and that anything can happen in the market.

What did happen was rather interesting. As I last mentioned, I was looking for the market to break (reject) from this support/balance area and make a definitive move. What we got was a test of the low two weeks prior which held to the tick. There simply was no follow through as the selling completely dried up. 

Remember what I said about last week making a higher high by taking out the one time framing lower that had been occurring. That was a sign of potential balance returning to the market. The next thing the market did was test support where buyers were able to gradually respond. We are also at a huge level that being the year's low. We can expect there to be some large interest here by higher time frame money.

Once this became apparent, the only natural thing the market would need to do then is run back up to resistance. What we got then was one inside day of long accumulation on Tuesday. This was sparked by a test of the week's developing value area low which saw a "V" shaped bounce. From that point on, the market was clearly being controlled by buyers. Price could not make a sustained move below the week's VWAP once this really started to move higher. 

Here's a quick visual of this occurrence:

In the event you were wondering, the blue shaded areas are simply the overnight (globex) sessions. 

On Wednesday, we had the EIA inventories number which saw a drop in inventories to -4.3MM barrels down to 358 million total. Like price, inventories are hovering around the year's low. Fundamentally, this should be bullish on price. This is also a level (roughly the 360 million) where we have seen a bottom to inventories and a gradual rise from there. In January of this year, we did see a dip lower to the low 350s but essentially its a very important level to watch. 

Here's a snapshot of the report courtesy of the EIA:

We saw initial buying on the EIA number which took us up to the week's high. This knee-jerk reaction/algo driven move up stalled and dropped right back to VWAP for the week. Real Buyers (humans) again stepped in big and we saw a strong spike higher in to the close. This finally broke us out of the 3 day balance area that had been accumulating.

From that point on, the obvious directional filter became to the upside. Thursday saw a move far away from value which naturally had buyers back off until price returned back to value. We initially bounced off the developing value area high (DVAH) and then tested the swing high from Wednesday which was the week's initial balance high as well. I mention the initial balance because of its importance in the context of this week in that we were balanced and became imbalanced with buyers. This bounce was great confirmation showing that buyers were still in control. 

Lastly, yesterday (Friday) saw price open outside of value again. Once price dropped back to value, buyers stepped in and pushed the market higher. There was what many would consider an intra-day double-top which most likely drew in shorts that obviously did not see the bigger play at hand. Buyers absorbed the sellers around the day's initial balance high and cumulative delta returning back to the mean. This resulted in a great short squeeze into the close as the market spiked higher taking out the stops that accumulated over the last two days and closed the contract roll gap that we were looking for. 

Like I showed last week, here is a chart showing the week's volume and time spent at each price level with potential scenarios going forward. Let me remind everyone that this is in no way trading advice. Simply observations of potential outcomes that may occur. Please refer to the disclosures I have listed at the bottom of this page.

What I'm looking for now is a continuation higher to the 98 area. There are of course potential factors that could keep us from accomplishing this such as price is still trading outside of the developing value for the year. But the quarterly and monthly value charts are showing price returning back within value. So, this bottom up perspective could be signaling a potential change in trend. As we know, trends don't turn on a dime and its a process one in which we may be experiencing currently. 

There's still the potential for continued downside as well just to remain somewhat neutrally biased. We did trade below the year's low and this pause we've been experiencing could simply be a waiting pattern for higher time frame value to catch up to price and do what I like to refer as the "trash compacter". This often happens when opposing directional traders are lured into a position thinking the move is exhausted and they experience limited success in their position to only be for lack of a better word, violently crushed and stopped out of their position once value and price come together again. 

With that said, any long bias currently will need to be treated with caution. Additionally, next week is the last few days of the 3rd quarter. These events often experience some wild swings in the market due to rebalancing, etc. Not so much so as the equities markets but be cautious.

The last piece I want to quickly cover is the CFTC Commitment of Traders report. I look to keep an eye on this for more or less confirmation in what I'm seeing. I've highlighted the areas that I keep closest attention to as they represent more of an indication on directional expectations vs. producer hedges and Swaps. The "Managed Money" reporting is the most important area I watch as it represents what it says, managed money meaning CTAs, CPOs and any other professional related entity such as hedge funds. I also watch the "Other Reportable" as this represents mostly retail traders. 

Upon reviewing this past week's COT, we can see that the "Pro's" are positioned overwhelmingly long with a long-short ratio of almost 4:1. Retail on the other hand, is at roughly 2.5:1. We know retail is usually late or wrong so this is an interesting development to keep an eye on. 

Until next week, best of luck in the markets!


**Warning: Redistribution or copying of this content is strictly prohibited without our expressed written consent. This is not investment/trading advice. Trading in futures and options involves substantial risk. You may lose more than your initial investment.**

The Week In Review For Crude Oil - September 15th - 19th, 2014

Crude Oil experienced a round trip type of week in that it closed roughly where it opened but slightly lower. I've been watching the 92.20 - 92.40 area to serve as key support which was the year's swing low back from January and February. Last week took out that low to establish fresh lows for the year but closed right on this support area.

Fast forward to this week and we opened right in this area with buyers stepping in to push the market right back up to resistance. Once we hit the resistance area, there was "quiet" liquidation coming in while the market appeared to find balance. The last CLV14 (October) contract trading session remained within the previous session's trading range but continued liquidation became much clearer. The EIA inventory number was reported during this session as well which saw a build in inventories to 3.7 million barrels. There was a continued seller response to this number but the seller "wheel" was already in motion as the market pushed lower which retraced roughly half of Tuesday's range.

Then on Thursday, the first "formal" trading session on the CLX14 (November) contract, we saw a small roll gap between V14 and X14 and sellers ran with that gap to push the market back down into support. This was a great day in going with the seller imbalance as the market one time framed lower for the entire session. One time framing in layman's terms is when each 30 minute period does not breach the previous 30 minute period's high for down moves and low for up moves excluding inside periods in which neither the high or low of the previous period is breached. When this occurs, its a clear sign that the market is trending and one needs to go with that trend until the one time framing stops.

The market (CLX14) ended the week back down at the referenced support area and initially saw selling into the pit open which was short lived. As I just mentioned, the one time framing down stopped just before the lunch hour (EST) and proceeded to balance for the remainder of the day. One interesting note that occurred for the rest of the session is that the day's cumulative delta (difference between the bid and ask volume) continued to rise. This could be evidence of short covering and/or new longs being put into the market. I would suspect it was short covering and potentially further contract roll dynamics which should may be taken with a grain of salt.

Going into next week, we're at a key level still and we will see some clear indications of what the market is looking to do. Either we bounce off this support level and run back to test resistance again while closing out the contract change gap or we break below this support area and run to the next level of the 88 area.

Here's a map of the week's action via a Market Profile chart with some potential scenarios that "could" play out going into next week. I say "could" and not "should" as we never know what the market will do and remaining open-minded is the best approach which allows for a reaction rather than a surprise from a bias. I encourage you to click on all the charts (courtesy of Sierra Chart) below to increase the size and see more detail.

Here are some higher time frame charts that I'm watching for indications of trend continuation and levels of support and resistance.

As you can see on the higher time frame charts, the bearish sentiment is still well in tact. We've seen a pause at the current support level which is important to watch for a trend change but this past week's bar looks like a failed move. One thing to note is that this could just be evidence of potential balance returning as the one time framing down has stopped. Again, we're at the year's lows so its a very important level to keep an eye on.

In terms of rotations around higher time frame value, we can see that the market is trading within the previous year's range and testing both ends of the previous value extremes. One note about the current scenario is that we're trading outside of the current year's developing value. A continued rejection of developing value could see a breach of last year's low as we failed to take out last year's high. These are obviously huge target areas for long-term money and something to be closely watched.

Lastly, on a very large time frame perspective, we can see huge excess (rejection) being made at the key $100/barrel level while the $92/barrel has provided huge support with excess below. We know this is a huge psychological level. We have not taken out a previous year's low however since the big reversal in 2009 which could be a side effect of the liquidity gushing out of the Fed with its QE program but that's a completely different conversation in of itself. But since the market pushed higher in 2011 (most recent swing high in cycle), we've experienced major consolidation/inside bars of the 2011 year's range. This could signal a big move when price finally breaks out.

Hope this was helpful in understanding the market's current context. In summary, the overall trend is bearish but we've reached a key level on a higher time frame which may see a stall in this trend and see an eventual reversal. Further selling however could see a run for last year's low.


**Warning: Redistribution or copying of this content is strictly prohibited without our expressed written consent. This is not investment/trading advice. Trading in futures and options involves substantial risk. You may lose more than your initial investment.**