Crude Oil futures have been unable to build on recent gains, due to fears that China's economy may be slowing. The Oil market has already faced immense pressure recently from the European crisis and the rising US Dollar. It is unlikely that Oil prices will be able to stabilize and build without restoration of confidence in the Eurozone, as shaken confidence could lead to further gains in the greenback and risk aversion by investors. China's government has taken steps to prevent a housing market bubble akin to the one that has gripped much of the West. The expectation is that the Chinese government will continue to tighten its interest rates and place restrictions on excessive real estate speculation. In addition to tightening policy, Chinese manufacturing slowed to levels not seen since last June. The Oil market is very well supplied at the moment, and there is no indication that OPEC will trim production anytime soon. The beginning of the driving season in the US seems to be overshadowed by the weaker Chinese data. Good results along with renewed optimism in the US economy could go a long way in stabilizing prices.
Given the near-term bearish technical bias and the uncertainty in Europe and China, some traders may wish to take on a bearish position. Given the psychological support near the 70.00 level, some traders may wish to take a more conservative approach and considering the possibility of entering a bear put spread, like buying the July Crude 71 put and selling the 70 put, for example, for a debit of 0.30, or $300. The trade risks the initial investment for a potential profit of $700.
Turning to the chart, we see prices unable to cross back above the 75.00 level. This level happens to coincide with the 20-day moving average. The failure to cross the average can be seen as a negative in the near-term. Momentum was also showing some bearish divergence from the RSI, suggesting the market could find sustained downward pressure.
Robert Kurzatkowski, Trading Specialist