For commodity traders, the last few weeks have been interesting to say the least, and indeed these markets have demonstrated once again, if any further evidence were needed, that once reliable relationships appear to have broken down. For oil, and indeed gold, the inverse relationship with the US dollar, was one that could be relied on. However with the prospect of tapering now a dim and distant prospect, and equity markets continuing to disconnect from broader fundamental principles, this seems to be one relationship that is likely to remain broken for some time to come, with both oil and the US dollar moving lower in lockstep since early September.
For oil, whilst the fundamentals remains much the same, with the prospect of military action in Syria now diminished, the technical picture now dominates, and indeed in the last few days has triggered some interesting signals.
First, and as outlined in my analysis earlier in the month, the support platform in the $100.50 per barrel area was key, as shown with the green dotted line. As I outlined at the time, if this held, then oil prices could recover, but any breach was likely to see further bearish momentum. This level was duly broken in trading last week, with oil prices moving lower in a series of wide spread candles. However, a feature of the price action was the associated volume. Here we saw three ultra high volume bars clearly signaling heavy selling pressure, and validating the price action, confirming this as a genuine breakout from the price congestion above. The doji candle of the 24th has since triggered a minor rally, with the December futures contract climbing back to trade at $98.35 per barrel on Globex overnight. What is interesting however is the associated volume on the two up candles, with the ultra high volumes failing to move the commodity far – a clear example of one of Wyckoff’s rules – effort and result. In other words, given the volume we would expect to see a greater move in the market, and even the weakness in the US dollar is failing to provide any bullish momentum at present.
Moving to our volume at price histogram on the right hand side of the chart, once again this is painting a clear picture, with a deep and sustained area of price congestion now in place from $100.50 per barrel through to $104 per barrel. For any sustained recovery in oil, this area will need to be breached with strong and rising volume, and there is little sign yet that the market is ready to rally in the short to medium term. The volumes associated with the down move last week are as expected, with falling prices and rising volume, and until we see a sustained period of buying in the form of ‘stopping volume’ we can expect to see further weakness.
Tomorrow’s crude oil inventories are forecasting a build once again, and whilst the forecast of 1.8bbls is well below last weeks 5.2m bbls, any further build in oil inventories is likely to add to the bearish picture.
By Anna Coulling