Crude Oil Mid-Week Analysis for the Week of November 21, 2011

January Crude Oil confirmed last week’s closing price reversal top early this week. The pattern suggests the market could be well on its way to a 2 to 3 week break equal to at least 50 percent of the rally from $75.36 to $103.37. This price level is $89.37.

Uptrending Gann angle resistance comes in at $89.36 this week. This angle forms a support cluster and possible downside target zone with the 50 percent price level at $89.37 – $89.36.  Based on normal weekly volatility, this price is not likely to be reached this week, but the cluster should be noted nonetheless since stranger things have happened.

A downtrending Gann angle at $100.72 nearly crosses a 61.8 percent retracement level at $99.99. This is a resistance cluster and possible upside target. Since the closing price reversal top at $103.37 has been confirmed, traders are likely to treat this zone as a new selling opportunity.

Besides the potentially bearish chart pattern, overbought conditions may be also contributing to the topping formation. Now that the pattern has been identified, all it is going to take is increased momentum to drive it lower.

Fundamentally, the Euro Zone crisis and other outside factors seem to have control over the price action. The shedding of risky assets on Monday helped contribute to the sharp sell-off, but on Tuesday, traders were reacting to concerns that Middle East tensions could disrupt supplies. Some traders also pinned their hopes on the thought that the European finance ministers would somehow find a solution to the crisis without triggering a worldwide recession.

After weeks of speculation, the U.N. finally announced new international sanctions on Iran after finding evidence that its nuclear plants were producing weapons grade uranium. Even though traders knew this announcement would be made, the news appeared to underpin the market.

Also out of the Middle East, violent protests in Egypt led to speculation that increased episodes of mayhem could trigger a disruption in oil supplies. Although Egypt is not a large producer, the fear that unrest could quickly spread to larger oil producing nations encouraged short-covering as traders lightened up their positions on the news.

Factors Affecting Crude Oil This Week:

U.S. Supply and Demand:  Traders are looking for an increase of 1.5 million barrels of crude oil in this week’s EIA report. A smaller number will underpin the market while a decrease is likely to trigger a strong short-covering rally. A larger than expected increase will attract selling pressure, however, the other outside factors should prevent a freefall.

Technical Factors:  Overbought conditions and downside momentum could keep the pressure on crude oil the rest of the week. A slow down in momentum will be the first sign of a short-term bottom.

Euro Zone:  Crude oil prices could firm if the announcement by the International Monetary Fund to create a plan to help prevent the debt crisis in Europe from spreading begins to take hold. The IMF plan is designed to provide quick cash on flexible terms to countries facing sudden financial stress. As more details of the plan are revealed, the fear of a global recession may dissipate enough to encourage another round of buying.

Iran:  Now that the market knows sanctions against Iran are coming, traders will judge the impact based on the size and duration of the imposed restrictions.