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Why Crude Oil Should Rally into the Weekend

Heat rises from stacks at the Chevron refinery in Richmond, California.
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Heat rises from stacks at the Chevron refinery in Richmond, California.

It looks like crude oil could soon spike.

May crude oil futures pressed to new swing highs and above the .618 major retracement level at $95.55 yesterday, reaching a high of $96.45. After a strong close last Friday, and a trade though the 50 percent retracement at $94.45 on Monday, we have seen a massive short-covering this week. All rallies begin with a short cover, and this one has helped crude find a path of least resistance higher ahead of the three-day weekend.

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Last night, global fears and poor performing equities overseas helped push the dollar higher, and a stronger dollar, as you know, will put pressure on commodities priced in dollars. This should present a good buying opportunity, keeping crude in check early, and allowing traders to step in at the major technical support now at $95.55. The next support below here will be $94.45, and we expect longs to defend this level; only a close below here will signal a failure. The next upside target is just shy of $98, which was the high made on February 20. If the S&P makes new all-time highs, we could see $100 crude in the cards.

Look for a close on new swing highs above $96.45 for a further bullish signal, but do not forget the dollar index, and if it closes above new highs at 83.42, we may not see the full bullish potential in the crude market. On the other side, if the dollar index fails and closes below 83, look for a strong upswing in crude before the long weekend.

We are hearing that a large short position is covering into the quarter's end, which is bidding the market up. An addition reason for oil's strength is the three-day holiday weekend. Most traders I've spoken with want to sell out of their shorts to reduce their risk in oil.

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