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Crude Oil May Be in for a Strong Rebound and Rally


But if the US dollar moves higher to its upside target, it will break down below support.


Summary of Yesterday's Notable Technical Developments

Stocks rallied off the intraday lows to finish higher for the day. Leadership was provided by individual stocks like Goldman Sachs (GS) and Apple (AAPL), as well as key sectors like banks and semiconductors -- all were trading relatively well despite the negative tape for much of the day.

weakened after the 10-year Treasury auction results, sending rates back above the 3.4% level in the afternoon. The 10-year is still stuck in its trading range. Worth noting, however, is that the spread between 10- and 2-year Treasuries has widened to nearly 270 basis points. This spread -- an indication of inflation expectations -- has been growing and in recent days has broken out of its range. This merits attention.

were weak again as gold continued to retreat from the recent highs and crude oil was clobbered after the weekly inventory data was released. Gold is working its way back to very bullish support levels at around 1,100; oil is pulling back to critical "line in the sand" support at $66.06.

The US Dollar Index finished mildly lower after consolidating around the flat line for most of the day. It's sitting above minor support at 76 with more substantial support at 75.10 (the broken downtrend line).

Leading Into Today

  • Asian markets were lower overnight with Japan down more than 1%; European markets are moving in the opposite direction, higher by nearly 1% or more (as of 8:30 a.m. EST).

  • S&P futures are indicating a stronger open by about 0.5% for US equities so far this morning.

  • The US Dollar Index is mildly lower to flat.

  • Oil and gold are seeing a bounce this morning, up about 0.5%.

Critical Market Components

Click to enlarge

Market Internals

(Figures are rounded, and click images to enlarge)

Chart of the Day: Crude Oil Futures (at CL)

Click to enlarge

  • Wednesday brought bearish crude oil inventory data for the market. Rather than digest it, the market spewed both crude oil (-2.69% and 4.33% off the highs for the session) and natural gas (flat for the day, but 6.5% off the highs for the day) after the report was released at 10:30 a.m.

  • Crude oil is either in the midst of a wave IV correction or it has already completed wave IV and is now in the beginning stages of wave V lower.

  • As long as $66.06 holds up as support, there's still a chance for crude to rebound and rally up to the mid-$90s and possibly higher. If crude breaks support at $66, that will be confirmation that crude is in the early stages of wave V lower.

  • It's hard for me to be overly bullish on crude given my outlook for the US dollar in the short-term. I've stated in this forum that my firm, ThirdWave, believes the US dollar is in the initial stages of a significant move higher (from the current level of around 76 to 80-81). If the upside target in the greenback is even close to met in the short-to-intermediate-term, then crude oil will almost certainly break down below support.

  • If my outlook for the US dollar is wrong and it moves lower again, then crude should rebound quickly and move to test resistance levels significantly higher than current prices.

  • I know this isn't very definitive, so I'll be working diligently to provide additional looks at oil using different methods and other instruments.

Strategy: Look for a low-risk trade on the long side with crude oil as it pulls back to critical support at $66.06; it will either rebound strongly from there or break down below support. Use a stop on any close below $66. Don't initiate new shorts here as a rally could happen at any point above $66.06 (not a favorable reward-to-risk ratio).

No positions in stocks mentioned.

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