Crude Recovers After Large Decline On Significant Volume

Crude futures are posting some encouraging gains Thursday after large losses on significant volume yesterday.  Crude futures were struck by a surprise rise in weekly crude inventories after disappointing employment and services PMI releases.  Crude proceeded to crash below our 2^nd tier uptrend line before finding support at the psychological $65/bbl level.  Yesterday’s losses were certainly discouraging considering the volume, indicating we could witness more near-term losses should the S&P futures continue their decline as we anticipate.

We notice corresponding, fundamental pullbacks in both the EUR/USD and GBP/USD, a bearish indicator for crude futures due to their positive correlation.  A strengthening Dollar makes the Dollar-based commodity a less attractive buy to European countries.  To make matters worse, the ECB lowered its projection of yearly GDP growth, showing the recession is worse than expected in the EU.  Lower forecasts for production and manufacturing in the EU dents the optimism over better the than expected PMI data from Britain this week.  Truth be told, the EU has a greater influence over consumption of crude due than Britain due to its heavy reliance on exports.

While psychology seems to be shifting to the negative side in the market, crude futures have built up a solid foundation over the past few months.  In fact, a sizeable pullback in crude may be overdue considering the amazing run as of late.  Meanwhile, crude futures are trading back above our 2^nd tier uptrend, an encouraging sign fundamentally.  Keep an eye on the S&P futures, for if they retrace crude futures could follow suit.  Despite our projected near-term weakness in crude, we maintain our medium-term bullish outlook on the futures until further notice.

Fundamentally, we maintain our supports of $67.23/bbl, $66.78/bbl, $66.18/bbl, $65.49/bbl, and $64.76/bbl.  To the topside, we find resistances of $68.02/bbl, $68.63/bbl, and naturally $70/bbl.  $65/bbl becomes a psychological cushion with $70/bbl serving as a psychological barrier.  The crude futures are currently trading at $67.50/bbl.