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Global Trade Desk- Crude Oil Volatility Rises

Daily Client Note

Crude Oil (NYSE:WTI) Review


Crude Oil Volatility Rises

Quick-View:
The last West Texas Intermediate (WTI) (99.50) 4-hour chart signal was generated Jul 19 11 with a break above 98.50 that targeted 99.90, which has completed its cycle.  The previous signal was generated on Jul 12 11, with a break higher from 97.00 that targeted 97.50.

WTI is trading in the lower half of a trading channel created in May and Jun2011 that has 104.50 as upside resistance and 89.50 as downside support. The 97.50 price point is the technical area that has drawn in the most momentum over the last two months, and has created volatility again this week.

Potential for new trade signals to form is weak, after intra-day moves broke the 200-day SMA area at 93.00 and broke resistance at 97.50 which is the 50-day SMA area. The previous reversal through resistance at 100.00 on WTI has created a barrier that will be very hard to break higher from in one session.  Now is not the time to be holding WTI positions for the long term as valuations look lost.

Headlines:
News wires are very quiet regarding crude oil valuations, but this is a week of important economic releases that will set valuations for August.

Where-To Now: 
·         In a very mixed trading cycle that will not move any of the mid-term neutral trends until a Weekly chart can close  above 101.50 or below 89.50
·         Downside targets may include another test of  93.00 if S&P 500 equity trade closes a Weekly chart  below 1295, which could pressure regional growth and oil valuations
·         Expect upside tests of 99.90 resistance to fail if increased buying volume does not hit the overall market soon
·         Low-volume ramps higher are creating subsequent price action weakness when participation levels  increase on the down days, which is creating massive intra-day volatility

This review of technical sentiment is signaling to sell WTI at the previous day’s high, and buy at the previous day’s low with very tight targets

WTI Correlations:
WTI has a 36-month 75% correlation to S&P moves, and a 90% correlation to the euro (Eur/Usd) currency pair. Daily trading range on WTI is $2.50, which is below the historical norm and indicates decreasing speculative interest, and increased volatility as support and resistance areas are tested. WTI 200-day Simple Moving Average (NYSE:SMA) is at 93.10.

Previous Signals:
The second quarter of 2011 generated seven crude oil trade signals issued to clients, six of which completed and covered over 4.20 dollars of net movement at Target 1 areas, and 8.40 dollars of net movement at Target 2 areas. The misses came on days that instant volatility hit the global markets in reaction to breaking news headlines. Most signals have been generated from 1-hour chart algorithms. 

Exchange Traded Fund (NYSEARCA:USO) Outlook:
The outlook for USO (38.80), the exchange traded fund (ETF) that tracks oil momentum, is for consolidation above 36.50, and to struggle to easily break 39.90 resistance. The ETF is likely to continue to lag behind the main moves seen in WTI futures contract trade, as major oil price action is taking place while the US session is closed.

USO is in a mixed trend across most time-frames, and has developed a lot of price gaps at the Wall Street open. No long signals will form until a Weekly chart can close above 39.50. No short signals will form until a Weekly chart can close below 36.50. The Weekly chart close may offer some long-term clarity.

A near-term signal to move short on USO from 37.05 that could only manage a move to test 36.90 before reversing off support.

WTI Technical Section:
The WTI crude oil chart is trading in a price channel between 90.00 and 101.00 which was formed in Jun 2011. This area forms the lower part of a price channel between 96.50 and 103.00 which was created in May and Jun 2011.

The 50-day SMA area at 97.50 has been in play since the middle of June. The 100-day SMA at 101.50 will be major resistance areas that will not be easily broken in one session. The technical outlook reflects very well the fundamental question marks surrounding crude oil valuations.

Global oil markets are in a volatile pattern of trade that cannot generate momentum to break and hold support or resistance with ease. No mid-term long signals will form on WTI until a Weekly chart closes above 101.50. No mid-term short signals will form until a Weekly chart closes below 92.90. 

ABC Potential: Choppy and overlapping chart patterns are caught in a 2-month trading range with no clear technical signals. The linear trend-lines formed over the last month of trade will likely contain price action in the near-term, until the day that a screaming headline announces a breakthrough on government debt outlooks.

This Week's Call To Action: Near-term intra-day signals are all that WTI is offering. Buy tests of support and sell tests of resistance at the previous 24-hour session lows and highs. These charts show that fair value has been found on WTI.

A 4-hour chart algorithm signal was generated Jul 18 11 with a move above 99.00 which targeted 100.50, which took a long time to trigger.

Alternate 24-Hour Trade:
Investors who do not want to wait for their regional cash market to open to track the above moves, or do not have 24-hour access to the market they have open positions in, are able to access the 24-hour currency market. There is potential to analyze and trade currencies in a high-volume market that is supported by the global inter-bank system.

Investors can trade currencies in-line with a rising global market, or trade ahead of a falling cash market open. Being able to use currencies offers the opportunity to be in a trade before the regional market opens.

Traders could trade the currency pair EUR/USD in-line with the potential seen in global equity movement. Buying the US dollar and selling the euro on days of major commodity weakness is a simple process of placing a sell order on EUR/USD. That same position can then be managed in a similar way that equity trades would be bought and sold.

Detail of alternative Forex trade will be sent directly to clients once this week’s Federal Reserve and Earnings Season headlines are absorbed.