Navigating Correction-vs-Reversal Challenge in Dec Crude Oil, Diesel

October 18, 2016 8:27AM CDT

DEC CRUDE OIL

In 10-Oct's Technical Blog we cited that day's 49.15 low as the latest smaller-degree corrective low and new short-term risk parameter the market needed to fail below to confirm a bearish divergence in momentum and threaten Sep-Oct's impressive rally.  In the now-prompt Dec contract detailed in the 240-min chart below, 10-Oct's 49.71 serves as that corrective low and short-term risk parameter.  The market's choppy price action the past few days and ability to sustain gains above that threshold reinforce the still-bullish prospect that this choppy price action from last week's 52.16 high is just a (4th-Wave) correction within the uptrend that's got at least one more round of new highs above 52.16 to achieve.  A failure below 49.71 will negate this specific count and expose a larger-degree correction or reversal lower that is best avoided.

Crude Light 240

Crude Light Daily

The first of two main threats to a more immediate bullish count is simply the market's position at the extreme upper recesses of the 51.67-to-39.19-range shown in the daily log scale chart above.  If there's a factor or condition that could defer a broader bullish count and produce another intra-4-month-range relapse, it is the resistance defined by 09-Jun's 51.67 high and range cap.  And a short-term failure below a level like 49.71 would provide a reinforcing step to at least an interim peak/reversal condition.

Alternatively, looking at the barrel as half-full rather than half-empty, both the daily bar chart above and daily close-only chart below shows the market ABOVE all but a few days' price action over the past four months with former 49.00-area resistance from mid-Aug a key new support candidate within a developing uptrend that could move sharply higher if/when that Jun high resistance is broken.

Crude Light Daily

Crude Light Weekly

The second factor that could impact a more immediate bullish count if the market fails below an admittedly short-term risk parameter at 49.71 is our RJO Bullish Sentiment Index of the hot Managed Money positions reportable to the CFTC.  The weekly log chart below shows that this sentiment indicator has returned to a frothy 83% representing 359K long positions to just 71K shorts.  Such an extent to which this contingent has its neck sticking out on the bull side could easily become a source of fuel for downside vulnerability IF the market breaks the Sep-Oct uptrend with a failure below 49.71.  Until or unless such weakness is shown to, in fact, break the Sep-Oct uptrend, sentiment is not an applicable technical tool.

Finally, we would remind traders of our long-term bullish count that maintains Feb's 26.05 low ENDED the secular bear trend from May'11's 114.83 high and that the market is still in the relatively early stages of a multi-year correction or reversal of that bear that could drive prices back to the upper-quarter of the 8-year range between about 80 and 100.  Against the broader bullish backdrop a breakout above the 51-handle that has capped this market for the past four months could result in surprising gains thereafter.

These issues considered, a bullish policy remains advised with a failure below 49.71 required for shorter-term traders to move to the sidelines and longer-term players to pare bullish exposure to more conservative levels.  In lieu of such sub-49.71 weakness we recommend first approaching the past week's lateral chop as a corrective/consolidative affair that warns of a resumption of the uptrend that preceded it.

Crude Light Monthly

DEC HEATING OIL

UNlike the crude oil market and as discussed in 13-Oct's Technical Blog, diesel has confirmed a bearish divergence in momentum that warns of a larger-degree correction or reversal lower.  As these two markets are highly correlated, something's gotta give.

On the heels of 12-Oct's bearish divergence in momentum that broke the uptrend, yesterday's break below 13-Oct's 1.5716 initial counter-trend low left Fri's 1.6102 high in its wake as the latest smaller-degree corrective high and new short-term risk parameter the market needs to sustain losses below to maintain a more immediate bearish count.  Its failure to do so would render the sell-off attempt from 10-Oct's 1.6400 high a 3-wave and thus corrective structure that would warn of a resumption of Sep-Oct's rally.  Per such 1.6102 is considered our new short-term risk parameter in the now-prompt Dec contract from which non-bullish decisions like long-covers and cautious bearish punts can be objectively rebased and managed.

NY Gasoline 240 min

NY Gasoline Daily

Here, as with crude oil, the daily log chart above and daily log close-only chart below show the market still respecting the major resistance established by 09-Jun's 1.6316 high BUT thus far maintaining price above former 1.5725-area resistance-turned-support from mid-Aug.  IF the past week's smaller-degree weakness is just the start of a bigger intra-range relapse, then the market needs to 1) sustain losses below 1.6102 and 2) start selling off like it means it.  A break below yesterday's 1.5625 low would be the next reinforcing step in this regard and would more than likely be accompanied by a failure below 49.71 in Dec crude.  A recovery above 1.6102 would, alternatively, reinforce a bullish count and likely be accompanied by lateral-to-higher prpice in crude oil that would reinforce its bullish count.

NY Gasoline Daily

NY Gasoline Weekly

Finally, the weekly (above) and monthly (below) log scale charts show the market's inching this month above Jun's 1.5848 high amidst sentiment levels that are generally neutral and won't inhibit a bigger move either way.

In sum, shorter-term traders remain advised to maintain a neutral-to-cautiously-bearish stance with strength above 1.6102 required to threaten this count and re-expose the broader bull that would warrant a return to a neutral-to-cautiously-bullish policy.  Longer-term players remain advised to maintain a cautious bullish stance with resumed weakness below 1.5625 required to reduce further or cover altogether remaining bullish exposure in order to circumvent the depths unknown of a larger-degree correction or reversal lower.

NY Gasoline Monthly

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