Crude oil has rebounded nicely since Wednesday morning and is setting up well for a run past the $110.00 level. Crude peaked on March 1 just above this area before fading late in the session. By Wednesday morning, it had drifted back down to key support near the $104.25 area and is now trading at new highs for the week.
Crude Oil
Source: TradeStation
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Crude's powerful rally off the early-October lows ran out of steam just above the $104.00 area. After peaking here in mid-November, a healthy period of consolidation began. A dip in December dropped it below the 200-moving average during a one-third retracement of the October bull run. Crude bounced off this key level, just below $93.50, and was quickly back up against heavy resistance at the November highs. Crude put in multi-week highs here in early January before pulling back again. The contract traced out a tight bullish flag in the process while drifting lower. Unlike the December fade, this time the 200-day held, allowing for a higher low as the consolidation that began in mid-November showed signs of completion.
Last month, crude powered through the heavy supply zone in place near the November/January highs. The breakout began with a gap-higher open immediately following the long Presidents Day weekend. The surge lifted crude up to the $110.00 level, a $15.00 rally off the February lows, before losing steam. Crude retested support at the old highs, a one-third retrace of the rally, as the month closed and did so again this week.
I believe the consolidation phase that took place from mid-November through early February could prove to be very bullish. The $104.00 level is a key support zone and may have put in place the footing needed for a run past last month's peak. I expect this area to hold in the near term as a new bull leg develops. Strong momentum will be needed for a takeout of the $110.00 area, but once through, a new, higher layer of support will be left behind.
The equivalent levels in the United States Oil Fund (USO) are key support near $40.00, the November/January highs, and the February/March peak just above $42.00. I do not have a position in the USO at this time but will be watching the action closely over short term. Crudehas stabilized right in the middle of this month's range, but I doubt this will be the case for very long.
At the time of publication, Morrow had no positions in any stocks mentioned.