Trading position (short-term; our opinion): Short positions with a stop-loss order at $65.23 are justified from the risk/reward perspective.

Crude oil moved higher yesterday but reversed direction and actually managed to close the session only a little higher, forming a reversal candlestick. Will crude oil plunge right away?

Not necessarily, but it’s quite likely to decline rather sooner than later. The long-term resistance line was not broken and the short-term chart favors a bearish outcome as well. Let’s take a closer look (charts courtesy of http://stockcharts.com).

There are basically no changes on the long-term chart so we will quote what we wrote about it in our previous alert:

(…) As you see crude oil still remains under the key resistance zone (created by the 200-month moving average and the long-term blue line), which means that as long as there is no breakout above this area higher values of the commodity are not likely to be seen and further deterioration is more likely than not.

The long-term chart has bearish implications, but what about the short-term one?

The initial move higher that we saw in the first part of yesterday’s session seemed encouraging, but the session’s overall implications are not really bullish. In fact, yesterday’s candlestick can be viewed as a reversal one and today’s performance of black gold suggests that the bears will prevail – at the moment of writing these words crude oil trades at about $59 – below yesterday’s and last week’s lows.

The following comments that we made yesterday remain up-to-date:

On top of that, the Stochastic Oscillator generated a sell signal, supporting the bearish case. As a reminder, we saw similar position of the indicator at the beginning of March. Back then, a buy signal generated by the indicator triggered a very short-lived upswing, which erased some of earlier drop. Despite this move, the commodity reversed and declined sharply after a sell signal, which suggests that we could see further deterioration in the coming week (especially when we factor in the gravestone candlestick formation and sell signals generated by the RSI and CCI).

(…) we can notice a potential head and shoulders formation. If this is the case, and oil bears take advantage of this opportunity, light crude will extend declines and test the strength of the green support zone (created by the Feb highs around $54-$54.24) in the coming days (please note that in this area the size of the downswing will correspond to the height of the formation).

Nevertheless, (…) oil bears will have to push the commodity below the green support line based on the May lows (the neck line of the formation is currently around $58.14) before we see an acceleration of the decline.

On top of that, (…) crude oil broke below the lower border of the rising wedge, which suggests a drop to the green support zone created by the Feb highs (in this area the size of the downward move will correspond to the height of the formation).

Summing up, although crude oil bounced off the neck line of a bearish formation on Monday, but this small rally was already invalidated as the black gold is currently trading at about $59 once again. Even if light crude moves little higher from here, the space for further gains will be limited and a breakdown below the neck line of the formation seems to be just around the corner. The outlook remains bearish.

Very short-term outlook: bearish
Short-term outlook: bearish
MT outlook: mixed with bearish bias
LT outlook: mixed with bearish bias

Trading position (short-term; our opinion): Short positions with a stop-loss order at $65.23 are justified from the risk/reward perspective. We will keep you – our subscribers – informed should anything change.

Thank you.

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

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