Trading position (short-term; our opinion): Short positions with a stop-loss order at $65.23 are justified from the risk/reward perspective.
On Wednesday, crude oil lost 2.06% as bearish EIA report and slight progress in Iranian nuclear negotiations weighed on the price. Thanks to these circumstances, light crude erased most of Tuesday’s increase and re-tested the support zone. Will it withstand the selling pressure in the coming days?
Yesterday, the Energy Information Administration reported that U.S. crude inventories increased by 400,000 barrels for the week ending on July 3, missing expectations for a 500,000 decline. Additionally, supplies at Cushing, Oklahoma, rose by 223,000 barrels last week, also missing estimates for a drop of 100,000 barrels. The EIA report also showed that distillate stockpiles increased by 1.6 million barrels, while gasoline inventories rose by 1.2 million barrels, which is a bearish signal, taking into account the fact that the U.S. driving season entered its peak gasoline demand period. In this environment, light crude reversed and re-tested the support zone. What does it mean for the commodity? (charts courtesy of http://stockcharts.com).
The situation in the long- and medium-term hasn’t changed much as crude oil is trading below the previously-broken lower border of the consolidation and the zone based on the Feb highs. Additionally, sell signals generated by the weekly indicators remain in place, supporting oil bears and further deterioration.
What impact did yesterday’s drop have on the very short-term picture? Let’s check.
In our previous Oil Trading Alert, we wrote the following:
(…) the commodity closed the day under the previously-broken zone created by the Feb highs (it serves as the nearest resistance at the moment), which suggests that yesterday’s upswing could be nothing more than a verification of earlier breakdown. If this is the case, and light crude declines from here, it would be a bearish signal, which will trigger further deterioration and another test of the $50 (please keep in mind that sell signals generated by the weekly indicators remain in place, supporting further declines) in the coming day(s).
From today’s point of view we see that the situation developed in tune with the above scenario and crude oil bounced down the resistance zone created by the Feb highs, re-approaching the green support zone created by the barrier of $50 and the 61.8% Fibonacci retracement level. This is a bearish signal, which confirms that Tuesday’s upswing was just a verification of earlier breakdown and suggests further declines.
Please note that although the commodity moved little higher after a drop to an intraday low of $50.91, we believe that as long as there is no invalidation of the breakdown below the Feb highs a sizable upward move is not likely to be seen.
Nevertheless, another acceleration of declines will be more likely if light crude closes the day under the green support zone. Will we see such price action? In our opinion it is just a matter of time. Why? We think that the best answer to this question will be the quote from our yesterday’s alert:
(...) this year’s rally is simply a sizable correction of the previous massive decline (...) there was no major breakout and the trend remains down, (...) as crude oil didn’t move above the long-term rising resistance line and the 200-month moving average.
(...) we would like to draw your attention to the fact that yesterday’s upswing is much smaller than the previous upward moves, which we saw at the end of May and later in June (all marked with blue on the daily chart). This means that the short-term downward trend remains in place, suggesting lower values of the commodity.
Summing up, in our opinion, short positions in crude oil are justified from the risk/reward perspective as crude oil verified the breakdown under the zone created by the Feb highs. Additionally, not only the long-term, but also short-term downward trend remain in place, suggesting lower values of the commodity in the coming days.
Very short-term outlook: bearish
Short-term outlook: bearish
MT outlook: bearish
LT outlook: bearish
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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