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Play of the Day: Oil Bears Taking Back Control?

Oil volatility stepped up today in favor of the bears, and it looks like there’s more action to come with a busy calendar ahead.

What’s in the line up and which scenarios should be on the watchlist?

Crude oil futures 1-Hour Chart by TradingView

WTI Crude oil futures 1-Hour Chart by TradingView

Crude oil bears have been in solid control since the end of September, pushing the market lower after topping out around the $95/barrel handle to current trading levels around the $84 area.

Keep in mind that oil prices went on a massive run from a major support area around $67 back in June, likely on several themes, including improving economic conditions, OPEC production cuts, rising hopes of a peak interest rate hike cycle, and rising odds of a “soft landing” outcome.

That’s a rally of around +40%, so it makes sense that some traders are taking profits off the table, especially as we move beyond those fundamental arguments that drove it higher.

This week, oil gapped up from the Friday close, likely due to the tragic geopolitical events in Israel. Historically, war in that region of the world does tend to spike oil prices higher, so the gap higher was not really a surprise.

What was a surprise, though, was that the upside was limited and despite continue violence between Israel and Hamas, oil volatility dropped with prices settling into a pretty tight range (roughly between $85 – $87) on Monday and Tuesday.

This may be a signal from the markets that expectations are that the war may not escalate further into a larger regional conflict, and/or that the recent bearish pressure remains on oil prices and outweighs geopolitical risks.

The latter seems to be the case, signaled by today’s consolidation break lower, with the market bottoming out just above the $83 handle before running out of steam.

So, what’s next?

Well, the calendar is still pretty busy this week with several events that may keep oil volatility elevated. First, we’ve got economic updates from China in the upcoming Thursday Asia session. Signals of potential growth or weakness from China tend to influence oil prices short-term, an understandable market reaction given China’s size and massive demand for oil (China imported 11M barrels of oil per day in the first half of 2023).

Next is U.S. CPI on Thursday U.S. session. This will likely influence the dollar and broad risk sentiment more than oil specifically. Expectations for the September read are to show a lower rate of growth than August, but with U.S. PPI data coming in above expectations on an annualized basis, there’s a possibility we could see a surprise upside CPI event.

EIA crude oil inventory data will come shortly after the U.S. CPI update, and this tends to have a direct affect on crude oil prices. A rise in inventory tends to bring in oil sellers while a drop in inventory (or a draw) tends to bring in oil buyers.

And finally, we’ll get one more round of Chinese economic updates, including trade and inflation data, on Friday.

That’s a lot of potential market movers in a short period of time, which means volatility will likely stay bid for oil prices…and volatility means trading opportunities! But with so many catalysts, that lowers the odds of a directional move playing out, so our setup has to be pretty strong.

For us, with recent behavior signaling bears are in tight control, we’re leaning bearish, but will stay in watch mode for an ideal setup. To us, that idea setup could be to wait for another bounce in the chart above, a possibility as the market tends to reverse on a gap fill and also the signal from stochastic that we may be seeing short-term oversold conditions.

If so, a retest of the strong technical area of interest (broken consolidation/falling moving averages/Fibonacci retracement area) and sustained bearish reversal patterns is the technical trigger to start paying attention.

The fundamental trigger to watch out for if you’re bearish is some combination of either a very strong U.S. CPI update (above forecast / previous reads on monthly and annualized basis), a big oil inventory rise, and/or net disappointing Chinese economic updates, warrants a deeper look and move to make a risk management plan.

If that all comes together, the odds of a continued move lower are pretty solid, and if the downtrend resumes, then the next support area that may draw in buyer orders is from $82 (previous swing low) down to $79 – $80 (August swing lows).

What do you think? Will bears stay in control or will this week’s remaining fundamental catalysts spark a strong upside move to break resistance around the $87 handle? Leave a comment below!

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