The Seasonal Summer Oil Play
03/30/2011 6:00 am EST
Global events have caused wild price swings in the oil futures, and as the summer months and oil’s seasonal strong period draw nearer, one level stands out as the most crucial one to watch.
WTI crude oil futures listed on the NYMEX are among the most liquid and widely traded commodity markets in the world. Average daily volume between 300,000 and 500,000+ contracts make it right up there with Standard & Poor's 500 e-minis and bond futures as being among the most actively traded markets.
But the past two weeks of trading just completed saw average daily volume plunge from the normal range noted above to half that or less—from nearly 400,000 contracts to less than 200,000 contracts since the March 14 trading session (gold line in volume study) began.
Meanwhile, price action went haywire and slammed all over the charts, making huge overnight moves and open gaps from one pit-traded session to another.
Here is a daily chart where I indicate a price level that has acted as resistance for the WTI futures contract over the past month:
It appears that crude oil futures were driven purely by global news and US dollar, euro, and yen gyrations, while many big traders stepped aside. Volume is the lifeblood of structured market action, and the dramatic daily volume plunge witnessed here says it all.
At the time of this writing, prices have held a daily close near the 106 recent highs zone. A descending trend line drawn from the peak high of the March 7 session extreme high down through three most recent sessions shows a vertical magnet formed at this congestion zone.
A clean break above the 105.80 area and into new multi-year highs has clear sailing upward. A rejection lower and drop back through the 102 area probably backfills open gaps to the upper 90’s zone, if not substantially lower.
The whole world is expecting crude oil prices to continue straight north as summer driving season and demands for gasoline increase. Four-dollar-per-gallon gas might meet solid rejection and substantial cutbacks in driving habits of cash-strapped Americans this summer, however.
Time will tell, as it always does. Meanwhile, keeping an eye on the daily chart is our road map to destination bullish or bearish crude.
Traders can also play the United States Oil Fund (USO). The charts look very similar.
By Austin Passamonte, independent trader and blogger, CoiledMarkets.com