Trading position (short-term; our opinion): Short positions with a stop-loss order at $54.12 and initial (!) target price at $35.72 are justified from the risk/reward perspective.
On Wednesday, crude oil lost 1.86% after the EIA report showed a larger than expected increase in domestic inventories. Thanks to this bearish news, light crude reversed and invalidated earlier breakout above the Aug high. What does it mean for the commodity?
Yesterday, the U.S. Energy Information Administration reported that crude oil inventories rose by 3.1 million barrels in the week ended October 2, missing analysts’ expectations for a 2.2 million barrels gain. On top of that, the report also showed that gasoline inventories increased by 1.9 million barrels, also missing expectations for an increase of 0.47 million barrels. Thanks to these bearish numbers, light crude reversed and invalidated earlier breakout above the Aug high. What impact did this event have on the technical picture of the commodity? Let’s check (charts courtesy of http://stockcharts.com).
Quoting our previous Oil Trading Alert:
(…) crude oil extended gains (…) which triggered an increase above the 38.2% Fibonacci retracement. This positive signal encouraged oil bulls to act, which resulted in a sharp rally to the Aug high (…) even if this resistance level doesn’t stop oil bulls, we think that the space for further gains is limited. What is the reason? (…) only $2 above the current levels is a solid resistance zone (marked with red circle) created by the 50% Fibonacci retracement, the psychologically important barrier of $50 and the 200-day moving average, which could stop further improvement.
(…) the size of volume that accompanied yesterday’s rally was tiny compared to what we saw at the end of Aug, which suggests that oil bulls may not be as strong as it seems at the first glance.
On top of that, (…) we think that the long-term resistance line (based on the weekly opening prices) in combination with the 50% Fibonacci retracement will be strong enough to stop oil bulls in the coming week(s).
Looking at the charts, we see that crude oil extended gains and approached the above-mentioned solid resistance zone, which encouraged oil bears to act and resulted in a pullback (as we had expected). With this downswing, light crude dropped under the Aug high, invalidating earlier breakout, which is a negative signal. Additionally, yesterday’s drop materialized on sizable volume, which suggests that oil bears are getting stronger. If this is the case, we’ll see further deterioration in the coming days and the initial downside target would be around $46, where the previously-broken upper border of the declining blue trend channel is.
Nevertheless, taking into account the current position of the indicators, we think that another test of the red resistance zone (marked with circle on the charts) should not surprise.
Summing up, the proximity to the solid resistance zone (created by the long-term red resistance line based on the weekly opening prices, the 50% Fibonacci retracement, the psychologically important barrier of $50 and the 200-day moving average) triggered a pullback, which invalidated the breakout above the Aug high. This negative signal in combination with the size of volume that accompanied yesterday’s drop suggests further deterioration (even if we see another test of the red resistance zone) in the coming days. Therefore, we believe that short positions continue to be justified from the risk/reward point of view.
Very short-term outlook: bearish
Short-term outlook: bearish
MT outlook: bearish
LT outlook: mixed with bearish bias
Trading position (short-term; our opinion): Short positions with a stop-loss order at $54.12 (yes, that far as the medium-term outlook is unlikely to change as long as crude oil stays below the declining medium-term resistance line) and initial (!) target price at $35.72 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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