Having received a knock out punch from its yearly high of $88, crude futures managed to pick itself up off the mat at an intraday low a few weeks ago of $64 and fought its way back to a close on Friday of $74. Congratulations to everyone, Dennis Gartman, in particular, who foresaw the collapsing euro and positioned short on crude accordingly. Will the downward trend continue, or has crude carved out the proverbial bottom?
The energy complex futures are a play on world economic growth. Crude made its precipitous fall when hedge funds began worrying that debt problems in Europe would derail world growth and subsequently world demand for energy. Hedge funds began moving as a herd in early May, selling out of long ETFs and futures positions and either going short or playing it safe with their capital by sitting on the sidelines.
With strong economic data coming out of China this week, capital flowed back into energy, as traders saw value in cheaply priced crude, distillate and gas futures. Even the euro began responding last week to positive to successful European bond sales. US equities also showed positive signs that it too has created a technical bottoming formation. These are all evidence that the crisis is over and demand will begin eating away at record energy supply levels.
Traders are likely to be cautious this week and prefer waiting for crude futures to dip back to the lower end of the near term $69 to $75 trading range before adding to long positions. However, volume will increase on the lower end helping to ensure that a bottom is in place and allowing more aggressive traders to load up on any pull backs this week.
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