Crude Oil Update – Market Rallies after Sellers Get Caught in Bear Trap

March West Texas Intermediate Crude Oil futures are trading higher shortly before the regular session opening. The move is a follow-through rally in reaction to yesterday’s news of an unexpected draw in U.S. gasoline inventories. On Wednesday, the U.S. Energy Information Administration (EIA) said that gasoline stocks fell by 869,000 barrels last week to 256.2 million barrels, versus trader expectations for a 1.1 million-barrel gain.

Technical Analysis

The main trend is down according to the daily swing chart. The trend turned down earlier in the week when crude oil took out three bottoms at $52.24, $51.72 and $51.59. However, momentum shifted to the upside on Wednesday with the formation of a potentially bullish closing price reversal bottom.

Earlier today, the closing price reversal bottom was confirmed on a move through $52.67. This could lead to a 2 to 3 day rally. The first target at $52.78 to $53.15 was reached earlier today.

Yesterday’s turnaround did not come as a surprise because it started when the March contract traded inside a major 50% to 61.8% retracement zone at $51.53 to $50.29. This is why you need to know price as well as chart pattern. Those who trade or analyze only patterns got caught in a bear trap.

It’s alright to sell weakness through a bottom, but you have to be aware of what is underneath the bottom.

Forecast

Based on the current price at $52.71 and the earlier price action, the direction of the market today is likely to be determined by trader reaction to the short-term 50% level at $52.78.

A sustained move over $52.78 will indicate the buying is getting stronger. This is followed by a downtrending angle at $53.09 and a minor Fib level at $53.15. Both levels may act like resistance on the initial test, but taking out $53.15 could trigger an acceleration into $53.72.

If sellers show up to defend $52.78 then look for a pullback into $52.22. The daily chart opens up to the downside with the next targets coming in at $51.72, $51.41 and $51.35. The latter is the last potential support angle before the $51.22 main bottom.

Watch how traders react to $52.78 the rest of the session. Remember that a good rally usually starts with a strong short-covering rally. This wipes out those that sold weakness on Wednesday. The retracement of that first short-covering rally will tell us if this market is moving higher or lower over the near-term.

Buyers are going to try to set up a secondary higher bottom, sellers are going to try to drive the market through $51.22.

Don’t forget to take a look at the next Commitment of Traders report. It showed record longs last week. My guess is that the Tuesday/Wednesday break took out some weak longs, but most hedge funds remain decisively long.