Oil Trading Alert originally sent to subscribers on July 14, 2014, 7:48 AM.
Trading position (short-term; our opinion): In our opinion no positions are justified from the risk/reward perspective.
On Friday, crude oil lost 2.34% as fading concerns over supply disruptions encouraged investors to resume selling. In this way, the light crude fell to its lowest level in almost two months and slipped below important support lines. Will the psychological barrier of $100 stop further deterioration?
In our Oil Trading Alert posted on July 10, we wrote that Libya had announced the resumption of operations at its main oil fields, which resulted in a drop to a 5-week low. Although Thursday’s upbeat U.S. jobless claims data supported the price and triggered a corrective upswing, investors figured out that the 340,000-barrels-a-day Sharara field could bring Libya's oil production close to one million barrels a day (three times the current level), which encouraged them to resume selling. As a result, light crude dropped below $101 per barrel. Will we see a test of the strength of the psychological barrier of $100? Let’s check what can we infer from the technical picture (charts courtesy of http://stockcharts.com).
From this perspective, we see that crude oil extended losses and dropped below the support zone created by the June low, the 50-week moving average and the lower border of the blue triangle. Although the breakdown is not confirmed, this drop is a strong bearish signal. If oil bulls do not push the price above this support/resistance area, we’ll see further deterioration and the current correction will likely accelerate in the near future. If this is the case, the initial downside target will be around $98.74, where the April low is. However, taking into account the fact that sell signals remain in place, it seems that oil bears may push the commodity even lower (the next target would be around March low of $97.55).
Having say that, let’s check the very short-term picture and find out where the nearest important support levels are.
Looking at the above chart, we see that crude oil reversed and fell sharply, dropping not only below the June low, but also under the long-term declining line and the blue support line. This is a strong bearish signal (especially when we factor in the fact that the commodity closed the day under this support area), which will likely trigger further deterioration in the nearest future. In this case, crude oil will test the strength of the psychological barrier of $100. If this key-level holds, we’ll see a corrective upswing to around Thursday high of $103. However if it is broken, the commodity will drop to at least $99.92, where the 200-day moving average is. Please keep in mind that the CCI and Stochastic Oscillator are oversold, while the RSI dropped to its lowest level since January, which suggests that the space for further declines might be limited.
Summing up, the most important event of Friday’s session was a breakdown below two important support lines. As we have pointed out before, this suggests that the commodity will test the strength of the psychological barrier of $100. If this key-level holds, we’ll see a corrective upswing to around $103, but if oil bulls fail, the commodity will drop to at least $99.92, where the 200-day moving average is.
Very short-term outlook: bearish
Short-term outlook: mixed with bearish bias
MT outlook: mixed
LT outlook: mixed
Trading position (short-term): No positions are justified from the risk/reward perspective at the moment. We will keep you informed should anything change, or should we see a confirmation/invalidation of the above.
Thank you.
Nadia Simmons
Forex & Oil Trading Strategist
Przemyslaw Radomski, CFA
Founder, Editor-in-chief
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