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Crude Oil Pauses to Digest Recent Gains

Commodities | Dec 07 2010

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By Ilya Spivak, Currency Strategist  and  Sumit Roy

Monday in the US (Tuesday in Australia) was a day of pause for financial markets as risk assets consolidated the huge gains from last week. Crude managed to eke out a US$0.19, or 0.21%, gain to settle at US$89.38 after spending most of the session with minor losses. Similarly, U.S. equities finished mixed, with major indices closing on either side of the unchanged mark.

Many market participants took their cues from a broadcast interview with Fed Chairman Ben Bernanke. The Chairman maintained a cautious outlook on the U.S. economy, but indicated that the central bank stands ready to provide additional support if necessary. He even indicated that a third quantitative easing program was a possibility. This is all unequivocally bullish for risk assets, including crude.

We continue to expect that prices will advance well into the US$90’s before any meaningful correction. There are no notable economic events for Tuesday (Wednesday in Australia), thus oil may take its cues from movements in U.S. equities. There too the bias is higher.

Technical Outlook: Prices have stalled having taken out resistance at US$88.63, the 11/11 swing high, with negative RSI divergence hinting the rally may not have much space to continue. Initial resistance stands at US$90.65, the intersection of the 123.6% Fibonacci extension of the 11/11-11/17 downswing, and the top of a rising channel carved out since late August. The US$88.63 level has been recast as near-term support.

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