Fundamentals

Crude Oil futures posted solid gains yesterday, after the ISM manufacturing index posted a stronger number than analysts had expected. The positive news from the manufacturing sector was a welcome relief for traders, who have been inundated with negative economic data of late. All signs seemed to have begun pointing toward the possibility of a double-dip recession, so the report offers a ray of hope for the economy. Traders even shrugged off the EIA's report showing another large build in Crude Oil inventories. Therein lies one of the two major obstacles for Crude Oil bulls. The US is very well supplied at the moment, indicating there needs to be an uptick in economic activity and consumer use for inventories to be worked down. This weekend marks the end of the driving season, so next week's MasterCard survey, which reports spending at the pump, could be of great importance in the near- term. The other problem facing Oil bulls is the US employment situation. Consumers have been reluctant to open their pocketbooks at the pump and at the register. Today's initial and continuing claims report as well as the non-farm payroll data tomorrow could shed a bit more light on where the current employment situation stands. Yesterday's ADP number was worse than consensus estimates, but was better than whisper numbers on the street, which also offered some encouragement. The market could ride the wave of optimism sparked by the solid manufacturing number in the near-term, but if inventories and unemployment remain high, Oil bulls may have to hope for a cold winter to work down current stockpiles.

Technical Notes

Turning to the chart, we see the October Crude Oil contract holding the 71.50 level, after testing that level several times over the past week. Yesterday was the second time the market bounced after a large down day testing this level, hinting that the market may have formed a near-term W-bottom. A close above 75.50 could be seen as confirmation of the pattern. The measure of the pattern indicates the October contract could once again test the $80 level, which has offered stout resistance in the past. A close below 71.50 suggests bearish price action may ensue. The RSI has rebounded from oversold levels and now sits in neutral territory. However, momentum has remained flat, creating near-term bearish divergence.

Trading Ideas

The fundamental outlook for the Crude Oil market remains biased toward the bear camp due to the large inventories of petroleum and the uncertain economic outlook. The ISM number does give traders some hope, but needs to be followed up with more positive data to swing the bias toward the bulls. The chart shows Oil holding the lower end of the range it has been in and may be forming a near-term bullish reversal. Some traders may wish to consider entering into a long October Mini Crude Oil position on a close above 75.50, with a protective stop at 73.50 and a target of 79.25. The risk of the trade is in the neighborhood of $1,000, with a potential profit of roughly $1,875.

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