WTI prices shot up yesterday out of the blue. Certainly risk appetite helped send the commodity prices higher, but the strong gains seen in Crude weren't matched by any other major risk-correlated asset yesterday, barring the Nikkei 225. But strangely it should be noted that WTI prices actually traded lower yesterday during the Asian hours when risk appetite was the strongest, and oddly, prices gained much more during late US session when US stocks are not exactly bullish.
If today's news headlines are anything to go by, the main reason for the extraordinary rally can be attributed to additional hedge funds placing speculative bets. Or, if other newswires are to be believed, it is the cold weather that is driving energy demand. Related to this point, some say that it is due to the unexpectedly high inventory drawdown, to the tune of 1.0-1.5 million barrels. All these points raised are not exclusive of each other, and it is entirely possible that a narrative can be woven: hedge funds buying WTI contracts in huge volume speculating that there will be an unexpected drawdown of inventory (updated to be released by the Department of Energy on Friday) due to the cold weather. However, the fact that so many different news outlets are not singing the exact same tune suggests that they are only getting piecemeal information - in summary, nobody has an actual clue as to what caused this exactly, and we are all simply speculating.
Hourly Chart
Therefore, it is no surprise that prices are currently pulling lower, and we are testing the 102.5 round figure which happens to be the confluence with the rising trendline. Stochastic readings also agree, with a fresh bearish cycle emerging with more than half of the cycle to go. As such, if 102.5 is broken, it is possible that we could see further selling to bring us back to 101.37 where all it started. However, as we do not truly know the reasons for yesterday's rally, it may be premature to assume that the reasons for the rally have dissipated. Hence, bears need to be prepared that we may never reach 101.37 even in the event of a trendline break, and traders who are holding short positions with small profits may wish to evaluate if continuing to hold shorts is worth the risk when bearish momentum starts to stall around the 102.0 region.
Daily Chart
The Daily Chart shows the strong bullish momentum that has been in play since mid-January, and there is no sign that this momentum is abating. This lends further strength to the S/T conservative approach as a S/T bearish move can be regarded as counter-trend.
Looking at the Daily Chart alone, the current bullish momentum seems to be on track to reach 105.0 resistance. The 103.0 round figure is not really a "strong" resistance level on the daily chart as it is merely the midpoint of the consolidation seen in October '13. Hence, do not be surprised if WTI is able to break this level on pure momentum alone without fundamental support. Of more concern is the fact that bullish rallies haven't suffered any significant bearish pullbacks, with Stoch readings staying within the Overbought region for a large portion of time during the rally. This demonstrates the unreliability of the counter-trend Stoch signals during strong trends. As such, we can reasonably ignore the fact that Stochastic readings appear toppish right now. But this doesn't change the fact that the risk of a significant pullback is high moving forward, and traders will need to take that into consideration if they wish to go long WTI.