Crude oil futures have offered a master class in technical analysis over the last three to four months, providing traders with patterns and objectives of all shapes and sizes. The current trend of the crude oil market is down on a short- and intermediate-term basis, but most sideways on from a long-term look. Since peaking at 123.68 on June 14, crude oil has witnessed at least a three-wave corrective sequence. It is too early yet to say whether the current three-wave corrective sequence is complete or whether this is merely a pause ahead of a resumption of new lows below 95.10. An interesting note about the current downtrend has been the strength in calendar spreads which saw the front-month spread rally to the second strongest level in the life of the contract even as crude oil continued lower. The Sept/Oct calendar spread was also stronger, rallying to new contract highs on July 7, leading the futures rally higher. When the forward curve of a market is rallying, it is typically not consistent with futures continuing to decline. Momentum indicators are also arguing for higher prices with crude putting forth a bullish divergence with price on the decline to 95.10. We would consider that bullish divergence confirmed on a move above 111.45. These issues considered, a cautiously optimistic view of crude oil prices based on momentum and strength in the forward curve can be held. A move back below 101.51 would cause us to stand aside with that view.U.S. DOLLAR INDEX:
One of the more impressive bull runs in any financial market has been the U.S. Dollar Index dating back to January 2021. This market has undergone corrections during its run, but drawdowns have been limited, and setbacks have been limited to 40 days. The U.S. Dollar Index traded through the 61.8% retracement of the 2001-2008 sell-off after rejecting that level twice in 2016 and 2020. The next level of resistance would be the June 2001 highs around 120.13. Admittedly, that would take another 12% rally from spot levels following the 20% rally this market is already on. That said, with the monetary policy desires expressed by the Federal Reserve, there is little reason to think the greenback is headed for a major correction in the near-term. Adding to that view is the general weakness of the euro which makes up the largest weighting in the U.S. Dollar Index. So far, the United States is on much better economic footing than the EU, which should keep the dollar in higher demand. A bullish policy remains advised in the U.S. Dollar Index with weakness below 101.4140 needed to move to a neutral or bearish stance.
When discussing crude oil and the U.S. Dollar Index, a broader discussion of commodity indices is usually appropriate. As would be expected with energies, grains and metals selling off in June, the BCOM underwent a sizable correction, trading to the lowest levels since February. That said, the current correction has yet to retrace even 38.2% of the entire 2020-2022 rally. Typically, corrections span between 38.2% and 61.8% of the previous rally, meaning this correction either isn't over or a rally back to new highs is forthcoming. It is much easier to make a call that further correction is looming as opposed to new highs. All we can do is watch momentum indicators and the underlying assets like crude, copper and corn for turning point clues. With an expectation crude oil will continue to recover, while corn has begun an upside correction, odds are good the BCOM will recover further this week. Negating this more supportive stance would simply be trade below the July 6 corrective lows at 110.1000.
Comments above are for educational purposes only and are not meant as specific trade recommendations. The buying and selling of grain or grain futures or options involve substantial risk and are not suitable for everyone.
Tregg Cronin can be reached at firstname.lastname@example.org
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