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Crude Oil's Drop: Do or Done?


With the benefit of hindsight, a more apt title might have been "Do or Die on the vine."


The last review of Crude Oil was eleven weeks ago, "Crude Oil: Do or Die." With the benefit of hindsight, a more apt title might have been "Do or Die on the Vine."

The "larger downleg" that had begun the prior week did drop 6 dollars into a low that was retested one month later. Buyers certainly weren't in control, but neither were sellers, and the larger drop was actually a larger consolidation.

Crude Oil then rallied 10 dollars to new highs by a 2-1/2 dollar margin as hostilities escalated between Israel and Hezbollah. The rally peaked almost simultaneously with a condemnation of Hezbollah from Saudi Arabia, taking Oil out of the equation, allowing it to "crash" 6 dollars in two days. That was six days ago, before Friday's session finally broke lower.

As breaks go, Friday's was substantial. The open's $1.65 loss was nearly as large as the recent trading range's width. And the balance of the session never recovered above the consolidation's lows.

But the open's break was also brief, and didn't extend any lower intraday. The balance of the session did remain under pressure, score one for sellers. Score another for sellers in their preventing the consolidation's lows from being touched after the break, despite coming within a dime. But sellers failed to exploit these two successes and produce a new session low.

After a week of continuing military hostilities and dwindling political support, it's not unreasonable to assume that buyers were expecting the rally's resumption. But the politics had shifted to pressuring Israel for "cessation of hostilities" while a cease-fire could be negotiated. Saudi Arabia had already taken oil out of the equation, and as the weekend's two-day illiquidity drew nearer, sponsorship among buyers got nervous.

A bounce back into the recent consolidation would be normal, regardless of whether the bounce were to gain traction, or just correct the break so a more substantial downleg could begin. The outstanding gap from Thursday's close at $74.45 (basis Sept.) will inhibit extending the decline so long as it remains unfilled, and there is room to bounce another quarter-point higher before signaling that Friday's break was false.

Crude Oil would track the optimal bearish pattern by gapping up at Monday's open to test its bounce limit, where a more substantial downleg would be expected to originate. Waiting to bounce 2 dollars until testing the $72.50 area wouldn't yet be bullish, but it would keep alive potential for the bounce limit to be exceeded. Meanwhile, any close just one dollar under $72.50 would seal a massive Double Top with May's prior high.
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