Seasonally, the distillates (heating oil) market tends to post an initial low in mid-December and a secondary low in late-January. After that the spot-month contract tends to rally about 17% through the first week of July, according to its five-year seasonal index (weekly closes). This month has seen the spot-month contract increase 3% from its low weekly close of $2.8719 (second week of November), raising the question of whether or not the market is starting an earlier than normal seasonal uptrend.
The answer, from a technical point of view, is probably not. A look at distillates' weekly chart shows the spot-month contract is in a sideways trend. The upper end of this range is at $3.2254 (the high from the week of August 26) with the low end at $2.8285 (the low the week of November 4). Using these two points, the mid-section of the current sideways trend is between $2.9801 and $3.0738 (blue lines), prices that mark the 38.2% and 61.8% retracement levels of the previously mentioned range.
Weekly stochastics (bottom study) help us differentiate between trend types. A close look at this study shows the last major crossover occurred the week of September 12, 2012, just as the spot-month contract was in the process of establishing a double-top formation near $3.2668 (high the week of October 8, 2012). This bearish crossover above the overbought level of 80% offset the previous bullish crossover below 20% that occurred the week of June 25, 2012. Since then distillates have been trending sideways in an ever narrowing range, as marked by the dashed trend lines (top side red, bottom side blue).
Some may be asking about the apparent crossovers by weekly stochastics since then. If you look closely, these have occurred below the 80% and above the 20% levels, signaling that the secondary trend remains sideways. And with the last major crossover again being bearish, the classification of the trend would be sideways to down.
Therefore, distillates would look to test the resistance area mentioned above before turning lower once again. However, the next sell-off could result in a test of the previous low only, if the low-side trendline continues to provide support. This could put technical support closer to the $2.8500 price level, possibly pulling weekly stochastics back below 20% and in position for a major bullish crossover indicating the beginning of the seasonal uptrend.
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