Trading position (short-term; our opinion): No positions

Yesterday was definitely the oddest day of this year and one of the oddest days in the last couple of months. Crude oil was likely to slide much further. It had all the reasons to do so. A breakdown below important lows, a lot of room to decline (all the way to the 2008 lows), the momentum was strong, and the crude oil supplies had increased. Yet, it rallied. It was one of the odd days when the history didn’t repeat itself and what was likely to happen didn’t actually happen.

Now, what does it tell us? That the situation is now actually much more bullish than it seems at the first sight. It is almost always the case that when a given market doesn’t react in the same way (be that bullish or bearish) to the developments that used to generate a certain reaction, then it is a strong suggestion that this market is about to move the other way. For instance, when gold stocks show strength relative to gold (they refuse to decline given falling gold prices), we have bullish implications. The same is the case if gold doesn’t decline despite the rallying USD Index (this was followed by a rally in the precious metals sector in the recent days). We have just seen this type of action in crude oil.

While the first sign of strength is significant, it was just one day that the strength was present. Can one day change a lot? Technically, in some cases it can (in case of breakouts or breakouts above major resistance/support levels that happen on significant volume), but at this time it seems that we need to wait for an additional confirmation of the strength. The odds are that yesterday’s price action was an “outlier in the data” or simply put “an accident”. If we see the same type of reaction in the coming days, then the risk/reward ratio might justify opening long positions in the crude oil market - just like it was the case in the gold market recently. The size of a potential rally in crude oil is enormous as the current move lower has been huge.

In today’s pre-market trading, the USD Index moved a bit lower and crude oil moved a bit lower as well - which doesn’t confirm the crude oil’s strength. Will yesterday’s meaningful action be confirmed? We’ll have to wait and see if the strength continues before going long. We’ll keep you - our subscribers - informed.

Thank you.

Nadia Simmons
Forex & Oil Trading Strategist
Przemyslaw Radomski, CFA
Founder, Editor-in-chief

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