Crude Oil Testing Key Retracement Zone, Conditions Ripe for Reversal Bottom

May Crude Oil futures are under pressure early in the session on Tuesday. Prices fell on signs of weakening gasoline demand, and on concerns the global crude overhang will persist longer than expected.

The early session weakness came after U.S. gasoline demand during January fell for the first time in 14 months. Meanwhile in Asia, oversupply and slowing economic growth is forcing some traders to store unwanted gasoline aboard takers as onshore storage facilities in Singapore and Malaysia are filled to the rims.

Growth in gasoline demand has been one of the strongest pillars of demand in the fuel complex, largely credited for preventing crude prices from tumbling even further than they have.

The fundamentals say crude oil could fall lower again soon, as an emerging gasoline glut potentially adds to a global overhang in crude production that sees over 1 million barrels of oil produced in excess of demand every day.

The supply/demand picture may be bearish, but technically the market is currently testing a key retracement zone that could fuel a turnaround if value buyers decide to support the market, or if there is a surprise news announcement.

The only bullish story that can turn this market higher is a surprise production cut announcement. The production freeze proposed by Saudi Arabia and Russia will only guarantee over-production and rising inventories. Nonetheless, because of the importance of the retracement zone, crude oil traders should be prepared for any scenario.

Technically, the main trend is down according to the daily swing chart. It is going to take some time to form a support base that could lead to a change in trend to up, however, today’s session begins with the market in the window of time for a potentially bullish closing price reversal bottom. This chart pattern will not signal a change in trend, but it could lead to a dramatic shift in momentum to the upside.

The main range is $29.85 to $42.49. Its retracement zone is $36.17 to $34.68. This zone was the primary downside target of the closing price reversal top formed at $42.49 on March 18. This zone is currently being tested. If profit-takers or aggressive counter-trend traders are going to start buying then they will start inside this retracement zone. Therefore, we have to conclude that the direction of the market over the near-term will be decided by trader reaction to $36.17 to $34.68.

Overcoming $36.17 will signal the presence of buyers. The first upside targets are a pair of angles at $36.35 and $36.99. Overcoming $36.99 will trigger an acceleration to the upside.

A sustained move under the Fib level at $34.68 will indicate that the selling is getting stronger. This could lead to an acceleration to the downside with the next major target coming in at $30.54 today.

Today, we’re going to watch the price action and read the order flow inside the $36.17 to $34.68 retracement zone. We’re looking for a closing price reversal bottom to signal the start of a possible short-term bottom. The market is in a value zone according to the daily chart. Now all we need is a surprise news event to trigger a short-covering rally.