Brent bulls may get up off the mat but bears still dominating

It looks like traders may have dipped into the eggnog a little bit early, as markets have been extremely groggy so far today. Of course, this is historically one of the slowest weeks of the year as traders tend to focus more on last-minute holiday shopping and travel plans than the generally lackluster markets.

One of the markets that actually is showing a bit of volatility is oil, with the Brent crude contract dropping down to hit a fresh 11-year low near 36.00 this morning. Rather than any new data, the latest round of selling still stems from the ongoing supply-demand mismatch. On the supply side, US shale oil continues to flood the market and traders fear the influx of Iranian oil after sanctions are lifted next year. Meanwhile, the economic slowdown in China and Europe, as well as warm global temperatures as a result of climate change and a relatively warm El Niño conditions in the US, have reduced demand. This toxic one-two blow to oil bulls shows no sign of relenting and could be a major theme to watch in the first half of 2016.

Technical view: Brent

Turning our attention to the chart underscores the bearish outlook for Brent. After seeing a quick $3 rally early last week, the early gains evaporated by Friday and the contract has gone on to break last week’s 11-year low already today. A close near current market levels would mark the 10^th bearish close in the last 12 days, so it’s not surprising that the lagging MACD indicator is showing strongly bearish momentum and the RSI indicator is in oversold territory.

Of course, there will be little in the way of market-moving releases over the next two weeks, so bearish traders may opt to book their profits ahead of the New Year, potentially leading to a brief bounce in Brent. That said, even a relatively big bounce would do little to damage the long-term bearish case; as long as Brent stays below key psychological resistance at $40 and key previous-support-turned-resistance at $42, sellers will remain in control.