As we embark on the tail end of the year, the 4th Quarter, the underlying trend for crude oil is up with yearly gains of just over $21.00. For the first 2 Quarters, the market streamlined higher from its worst levels of 2008 at $32.48 up to $73.38. The Bulls made another push to new yearly highs at $74.96 in the 3rd Quarter despite a corrective flush to $58.32, but most of the action was mainly choppy. For July-September, crude oil whipped back and forth from around $65.00 to $73.00 indicating a loss in momentum to the upside with trade in a major consolidation phase.

The Bull run of 2009 was due in part to typical short covering and discount buying coming off of the major 2008 plunge from record highs at $147.27 to $32.48 as well as weakness in the dollar and strength in equities, but more importantly was fueled by the perception of an economic recovery. The breakout leg which commenced upon breaching the $54.00-$55.00 threshold was mainly driven by the talking heads touting that an economic recovery will bring on an increase in the demand for crude oil and its related products. Demand for 2009 has been overall weak due to the recession but has marginally improved recently. Yet we'll need to see a significant improvement to justify the continuation of rising prices. The wide consolidation swings indicates that market participants are caught between whether to believe in an economic recovery or to go with the fundamental reality of surplus inventories and weak demand. Helping the Bulls is the continued strength in the equities markets and the Iran wild card, but hurting them is the near 10% unemployment figure which, inherently, would lead to continued demand weakness.

4th Quarter Outlook

The technical picture on a quarterly basis shows a sold uptrend with the trend line crossing at 6600 until the end of the year, in line major monthly support at 6500 making up the key support range from $66.00-65.00. With the most recent price decline holding the $65.00 level, the market finished the 3rd Quarter with a Bullish attitude that's poised to challenge the 2009 highs from $73.00 up to 74.96 with room to reach the 38% Fibonacci Retracement point of the 2008 sell off at $76.30. If $76.30 is surpassed, then $80.00 to 85.00 crude oil is a definite possibility for 2009. Additionally, the 50% Fibonacci Retracement of the 2008 bear market comes into play at $90.00 if tensions flare in the Middle East.

Conversely, if the Bulls make that final push into the $75.00 to 76.30 range and fail, the potential for an end of the year downside reversal is greatly increased. In that scenario, we would look for checkpoints at $70.00, then the key $66.00 to 65.00 Quarterly/Monthly Support range. The key turnover that shifts the market into bearish territory is below $65.00 which, at a minimum, will target $60.00 down to the 3rd Quarter low at $58.32-58.00. Prices penetrating $58.00 will produce additional declines that target the 2009 upside breakout point at $54.66 at which point we would have to reassess to determine if that will hold heading into 2010.

Crude Oil Weekly Chart


The market finished up the 1st week of October strong fueled by solid short covering as September ended, closing last week just pennies below the $70.00 mark. With Friday's and Monday's trade finding Support at the $68.00 level, the market is poised to challenge the 3-month downtrend channel at $71.50. Steady price action or settlements above $71.50 this week will pave the way to target $73.00 to 73.60 Resistance up to the 2009 high at $74.96. A punch through $74.96 this week should propel the market to the Nov. contract's 2009 high at $75.90 up to the 38% Fibonacci level at $76.30.

For the downside this week, look to the $70.00 level for guidance. Settlements below $70.00 suggest the Bulls are struggling to maintain momentum with trade likely to do more work inside the $70.00 to 68.00 range. The key downside turnover this week is placed below $68.00 and expected to trigger bear drives to challenge the 4 QTR uptrend line and monthly Support zone at $66.00 to 64.95. Any trade below $64.95 reinforces bearish activity targeting $63.20 to 62.70 down to the bottom of the 3-month downtrend channel at $61.60.

Price Headley is the founder and chief analyst of BigTrends.com.