Support for Crude at $111?

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Includes: CVX, GLD, IAU, OIL, UDN, USO, UUP, XOM
by: Timothy Charles

Wednesday was an interesting day in the crude pits. First, the market opened substantially higher and crude moved straight up till the 9mm build of crude was announced by the DOE at 10:35am. Then it proceeded to have a $4 reversal over the course of the morning - then it rallied into the close. In between, there were many stories being thrown out there but one that I should have noticed had to do with the idea of support. Support, as most know, is a point where the buyers are stronger than the sellers and prevent sellers from taking the price lower. On the weekly chart of the crude contract, 111.50 is that level. As you can see from the chart, there is a double bottom there. Furthermore, this is occurring while crude is deeply oversold. Result: Perhaps a solid bounce higher...and not the plunge I was looking for.

At the same time, there are a few things working against crude. First, the aforementioned dollar versus gold model has turned into the favor of the dollar. Over the past 20 years, when this has occurred, crude has underperformed and in most cases, backed off toward the lows. Now that is not to say that crude moves down to the $30 barrel level. It does indicate though that the road higher will be difficult and paved with bearish stories. One of those bearish stories, could be the energy report from the morning.

I say "Could be" because this report had a little of everything in it. First, the headline build in crude was largely driven by imports though as one energy analyst I read indicated that the four week average of imports was somewhat inline with the figure today, making the "imports" excuse somewhat mum.

On the bullish side, the gasoline and heating oil inventory levels were reported stronger than expected for the bulls. Distillates are getting quite a demand push as overseas demand is driving down the levels of inventory we have on hand. Gasoline demand was actually lower again this week but in terms of year over year figures, sort of inline.

My rule of thumb with these inventory reports is to focus on the product that is the primary at the time of the report. In this case, it is gasoline though in a week or two, the focus on heating oil will be the story. Till then, the gasoline story is the one to run with on inventory day.

At the moment, the bulls might say that inventory levels have sunk over the past four weeks. That is true but if you delve into the details and review a few other anecdotal news stories, you would find that refiners are not building inventory - they are just not refining as much. I guess that happens when you practically lose money on each barrel of crude you refine! So essentially the crack spread is effecting the inventory levels. A more advantageous spread and the supply will start cranking!

Another interesting support for crude sits with the oil stocks. Now, I am not saying go out and buy yourself an XOM or CVX. I am saying that they are starting to show some relative strength and in the past this has served as an leading indicator for higher crude prices. These indexes I speak of though are not quite strong enough yet to buy. This could be just one oversold bounce being set up for another drubbing to the downside.

So here is the story going forward. Short term indicators are rolling over. My gold vs. dollar model favors the dollar at the moment which is again bearish for crude. At the same time, my short term model is oversold and thus selling down here might not be the best bet still the market unwinds some of the pressure.

The weekly model shows some support at 111.50 so as long as that level is held, this market should find some level of buying. The weekly bounce, if holds, would push for the $120 level. Longer term models still argue for lower prices. Add to this the breakdown in the USO through the 95 level and my previous forecast of lower levels is still in play. Thus, longer term I remain bearish on crude. Short term, I am looking for a bounce towards the $120 level. From there, we could resume the decline.

Disclosure: None

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