Trading position (short-term; our opinion; levels for crude oil’s continuous futures contract): Full short position in crude oil with $28.12 as the initial target price, and $51.13 as the stop loss level is justified from the risk to reward point of view. We are moving the stop-loss level slightly higher.

Crude oil soared early today (Jan. 4), and it even moved above its late-2020 highs… Only to disappoint and invalidate this quick breakout in the following hours. What seemed to be bullish, actually turned out to be a bearish sign.

From the long-term point of view, today’s price action was not too significant, but this perspective is important in order to see that crude oil bounced off the resistance created by the February 2020 lows.

Zooming in allows us to see that despite the early rally, the black gold has indeed invalidated the breakout. Consequently, not as much changed as first appears.

Even though crude oil moved higher today, its outlook has actually become more bearish, as invalidations of breakouts are sell signals on their own.

Consequently, since the outlook deteriorated, but the price moved higher, we are moving the stop-loss level higher – we don’t want to be thrown out of the trade automatically, should crude oil move slightly above $50 on a temporary basis.

The previous indications coming from the analysis of the USD Index also remain up-to-date:

Why would crude oil be likely to top and slide? For instance, because the USD Index has been moving in the opposite direction to crude oil, and the former is currently already extremely oversold. Whether or not the USDX has already bottomed is not clear. It seems that waiting for a bearish confirmation from crude oil and – ideally – a bullish confirmation from the USD Index is currently a good idea from the risk to reward point of view. The confirmation in crude oil could come in the form of a daily reversal (perhaps a “shooting star” candlestick) during which it would touch one of its above-mentioned resistance levels.

It seems that today’s session could end up being the above-mentioned daily reversal.

To summarize, it seems that crude oil might have just topped or that it’s very close to an important top, and thus I think that a short position in it is currently justified from the risk to reward point of view.

As always, we’ll keep you, our subscribers well informed.

Trading position (short-term; our opinion; levels for crude oil’s continuous futures contract): Full short position in crude oil with $28.12 as the initial target price, and $51.13 as the stop loss level is justified from the risk to reward point of view.

Thank you.

Przemyslaw Radomski, CFA
Founder, Editor-in-chief