We knew that fundamental activity would pick up this week; but the severe impact of today’s US housing data was beyond what could have been expected. It breaks are being thrown on the economic recovery faster than expected and commodities are suffering for it.

Crude Oil (LS Nymex) – $71.63  // -$1.47  // -2.01%

All too often recently, we have seen the conviction in breakouts from various assets completely collapse as the obvious lack of fundamental drive or questionable bearing on investor sentiment leaves a security drifting. This isn’t the case with crude oil’s bear wave. Though the energy market’s reversal began in the first full trading week of the month and momentum has notably cooled since the strong push on the 11th, this drive has nonetheless run 12 out of the past 14 active trading sessions. And, given the most recent, five-day string of losses; there is little sign of this strong move letting up. That being said, consistency grows even more unstable the longer it persists. That being the case, the desire for short interest to book profit and speculative longs to jump in on an early effort at reversal will increase should fundamental pressure let up.

At the momentum, the selling pressure behind the commodity is entrenched. A wave of investor-based risk aversion and fading growth trends has swept over the markets today, adding a tangible weight to return and demand dependent assets like oil. The top event risk on the day was the release of the macroeconomic existing home sales indicator for the US. While this reading is important for long-term growth forecasts, it does not typically carry the market on its own. That wasn’t the case today. The 27 percent plunge in pre-owned homes was more than double what was expected; and the level of turnover was the lowest on record. This ‘big number’ statistic is important because existing homes are the foundation of the sector (they are cheaper and more prevalent than new resident sales) and this area of the economy can drag the whole down with it. This particular report can further have the side effect of increasing traders’ awareness to growth data going forward – something with which the market will have in abundance. This will affect the demand side of the market; but for the supply side, we will look to tomorrow’s DoE figures for guidance. We have already seen net petroleum stockpiles hit two decade highs and a Bloomberg poll has analysts projecting a 27-year high in distillate holdings alone. Given this recent mix of data, it is hard to justify prices above $70, much less $80.

While the continuous oil contract is targeting the lows of July and May; it is interesting to note that the October expiration Nymex contract actually posted a record low close. That could encourage selling further down the curve and keep the pressure on the market overall. Also notable, we see volume on the contract hit a record 325,614; but the CBOE volatility index was little changed.

Crude Futures Chart (Daily)

Chart generated usingFXCM Strategy Trader

Tags | breakout, lack of fundamental, security drifting, US housing data