Crude oil flows to the upside
11/02/17

Traders eye upside as the market once again tests resistance.

It might not be an old-fashioned gusher, but crude oil futures (CL) have crept back on the radar of many traders by virtue of their persistent rally in the second half of 2017—and especially after they punched to a two-year high in early November.  

The move represents the market’s most sustained upswing since crude futures crumbled in 2014. While most will say calls for $100 oil are premature, traders are certainly eying a more realistic milestone—the nearby round-number target of $60. The rub? The current upthrust has brought the market to a significant resistance level: the top half of the trading range that has handcuffed the market for the better part of 18 months. Since then $60 crude has been an elusive goal for oil bulls, as resistance in the mid-$50s has repeatedly thwarted efforts to take the market higher.

On October 27, though, December crude futures (CLZ17) broke out decisively above the September high with its widest-range day in more than two months—and tacked on three additional days of higher highs, to boot. 

Crude oil futures (CL) 8/1/17–11/1/17

Source: OptionsHouse

In the days before crude’s 2008 peak-and-bust, breakouts of this magnitude were, more often than not, followed by additional upside over the next week of trading. Since then, though, follow-through has been a little harder to come by. After the 43 similar upside breakouts that have occurred since 2008, the average two-day and five-day moves in crude futures were losses. Only eight of these breakouts were followed by three days of higher highs, but the average one-day, two-day, and five-day moves were all positive.

Yesterday also marked the release of the weekly Energy Information Administration (EIA) Petroleum Status Report, which showed crude oil inventories shrank by 2.4 million barrels. Crude futures retreated on the news and traded to make new intraday lows—a sign some traders will undoubtedly see as an early sign the market is bowing to the will of its longstanding trading range. But crude’s immediate reaction to the EIA report is often counterintuitive, and it’s notoriously difficult to tie that response to the market’s behavior over the next several days.

Even if crude pulls back to test its recent breakout level, a convincing push above the Nov. 1 high could give traders the best sign they’ve had in quite a while that crude oil will capture the $60 flag.

 

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