Today the market continued its downward trend after another rally failed in the wake of OPEC’s appeal to its members to comply with their respective production reduction quotas.
The market reached another 19-month low overnight to hit $52.94 but rallied on OPEC’s appeal to its members to comply with their respective production reduction quotas. However, once it became clear that the market was unable to rally above the 2006 low of $54.85 in light of the estimate by Oil Movements that OPEC production will increase by 350,000 barrels per day in Jan. from its Dec. productions, the market continued its downward trend to hit another 19-month low at $51.80 before closing at $51.88.
Today’s market action is consistent with the Jan. 9 Crude Oil Market Analysis that “once the market breaks $55.00 to touch $54.70, it will be a free fall towards $50.00-$50.40.” This point is echoed by Barclay’s technician Philip Roberts in London, who said that “a pivotal moment in oil's decline so far this month is its passage through $55, and subsequently the lows of 2006, implying further near-term weakness.”
Fundamentally the market is very weak and shows no sign of bottoming out. Technically, however, the 14-day RSI for the Feb. contract is currently below 30, which indicates that the market is oversold.
Currently the market trades 83-cent higher at $52.71. The bounce is not alarming to the bears, since the market dropped rapidly to $51.80 after breaking $52.94 and has not traded in the $51.80-$53.00 range before.
Tomorrow will be an inside range day. The market will trade between $51.80 and $53.90, as some shorts cover to take profit.
Strategy: Hold short at $54.75 with a stop at $55.00 in case the market rallies above 2006 low of $54.85; take profit below $50.40.
Dr. Chen
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