Oil prices weakened for the first time in three days after a report showed that China, its largest energy consumer, is having significant weakness in the manufacturing sector. The official PMI reading plummeted to 49.7, lower than the forecast of 49.8 and below the key 50 boom/bust level.
Price action on the oil daily chart shows that the pullback is occurring after a sizable three day rally that took price from $38.95 to $49.33. Price is also respecting both the 50-day SMA which is currently trading at the $48.55 level and a heavily tested trendline that extends back to early May.
The recent rally was triggered by the Energy Information Administration report of lower production occurring in the US for the months of May and June. Regardless of the highly anticipated cut in production, oil is still extremely oversupplied. In the short-term, we may see oil trade range bound between the $40 and $55 zone.
Initial support could come from $43.61, which is the 23.6% Fibonacci retracement level of the May to August plunge. A deeper selloff could find major support from the 2015 low of $37.75.
If we see bullish momentum return, the psychological $50 handle could provide initial resistance, followed by the 200-day SMA.
The trade: Sell oil at $47.75, with a stop loss at $48.50 and take profit at $46.25. The risk/reward ratio is 1:2
Edward J. Moya
Senior Market Strategist
WorldWideMarkets Online Trading