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 Monday, crude oil declined sharply as OPEC's monthly report weighed negatively on investors’ sentiment. As a result, light crude lost 4.14% and invalidated the breakout above the Aug high, closing the day only few cents above the previously-broken Fibonacci retracement. Will we see further deterioration in the coming days?
Although OPEC forecasted that demand for its oil in 2016 would be much higher than previously thought as its strategy hit U.S. shale oil supplies, yesterday’s OPEC's monthly report showed that the oil cartel pumped 31.5 million barrels per day in Sept (an increase of 110,000 bpd from Aug), which was almost 2 million bpd more than its demand prediction for this year. Thanks to these circumstances, light crude declined sharply, invalidating important breakout. Will we see further deterioration in the coming days? Let’s examine charts and find out (charts courtesy of http://stockcharts.com).
Quoting our previous Oil Trading Alert:
(…) crude oil moved higher once again and re-tested the key resistance zone (marked with red circle on both charts) created by the long-term resistance line (based on the weekly opening prices), the 50% Fibonacci retracement, the psychologically important barrier of $50 and the 200-day moving average. Despite this improvement, the commodity reversed and closed Friday’s session under this zone. Additionally, the Stochastic Oscillator generated a sell signal (while the daily CCI is overbought), which could encourage oil bears to act in the coming days.
As you see on the charts, the combination of the key resistance zone and the sell signal generated by the Stochastic Oscillator encouraged oil bears to act (as we had expected). As a result, light crude declined sharply, invalidating the breakout above the Aug high, which is a negative signal. Additionally, recent candlesticks formed a reversal pattern (an evening star) on the daily chart, while the CCI generated a sell signal, which doesn’t bode well for the commodity and suggests further deterioration.
How low could light crude go in the coming day(s)? We believe that the best answer to this question will be the quote from our yesterday’s commentary:
(…) If (…) light crude declines from here, the initial downside target would be around $45.70, where the previously-broken upper border of the declining blue trend channel currently is.
Nevertheless, to have a more complete picture of the commodity, let’s examine the long-term chart and find out whether yesterday's decline had any effect on it or not.
From this perspective, we see that recent decline took light crude also below the previously-broken green dashed line, which resulted in an invalidation of earlier breakout. This is a strong negative signal, which will likely give oil bears an additional reason to act in the coming week(s). If we see such price action, and light crude moves lower from here, the probability of a head and shoulders formation will increase significantly.
Summing up, the key resistance zone stopped oil bulls and triggered a sharp decline, which invalidated the breakout above the Aug high and the green resistance line (marked on the monthly chart). Taking these negative events into account, and combining them with sell signals generated by the daily indictors, we believe that further deterioration is just around the corner and 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 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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