Trading position (short-term; our opinion): Short positions (with a stop-loss order at $48.56 and initial downside target at $35.24) are justified from the risk/reward perspective.
On Tuesday, crude oil reversed and moved higher once again on hopes that demand could grow ahead of the summer driving season. Additionally, another drop in the USD Index supported the price as well. In this environment, light crude hit a fresh 2016 high, but will it climb any further?
Let’s examine charts and try to answer this question (charts courtesy of http://stockcharts.com).
Quoting our Thursday’s alert:
(…) the recent rally pushed crude oil to a new peak, suggesting that the fifth wave may be about 161.8% greater than the first wave. If this is the case, we may see another upswing even to around $44.83 in the coming days (additionally, if we consider the last upward move (since Apr 5) we can also discern five waves).
From today’s point of view, we see that the situation developed in line with the above scenario and crude oil reached the upside target. With this upswing, light crude invalidated earlier breakdown under the black resistance line and approached the red resistance zone (created by the 76.4% and 78.6% Fibonacci retracement levels based on the Oct-Feb downward move).
Will we see further improvement? In our opinion, even if light crude moves little higher once again and increases to around $44.96 (in this area is the 127.2% extension based on the recent decline (from $43.69 to $39), we believe that as long as there won’t be confirmed breakout above the red resistance zone further rally is not likely to be seen.
Are there any other factors that could support this scenario? In our previous alert we analyzed the situation in the oil-to-gold and oil-to-silver ratios. Today, we would like to focus on the relationship between general stocks market and crude oil. What can we infer from it? Let’s examine the chart below and find out.
Looking at the daily chart, we see that the ratio extended losses and dropped to the green support zone created by the 61.8% Fibonacci retracement level based on the entire mid-May 2015-Feb 2016 upward move and 76.4% and 78.6% Fibonacci retracements based on the Oct-Feb rally. Taking this fact into account and combining it with positive divergences between the CCI, Stochastic Oscillator and the ratio, we think that reversal and higher values of the ratio are just around the corner. What does it mean for crude oil? As you see on the chart, there is strong negative correlation between the ratio and the commodity, which means that rebound of the ratio, will translate into correction in light crude (similarly to what we saw many times in the past).
Finishing today’s alert, we would also like to comment yesterday’s the American Petroleum Institute’s weekly report, which showed a larger-than-expected drop of 1.070 million barrels in crude oil inventories. Additionally, distillates stocks declined by 1.0 million barrels, while gasoline stock fell by 400,000 barrels (less than expected). Thanks to these numbers, crude oil futures hit a fresh high earlier today, which suggests a test of the red resistance zone later in the day.
Summing up, crude oil invalidated earlier breakdown under the black resistance line and hit a fresh high, which suggests that oil bulls will likely test the strength of the red resistance zone later in the day. Nevertheless, the current position of the daily indicators and the situation in the stocks-to-oil ratio suggests that lower values of the commodity are just a matter of time (short time).
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 $48.56 and initial downside target at $35.24) are justified from the risk/reward perspective. We will keep you informed should anything change, or should we see a confirmation/invalidation of the above.
As a reminder – “initial target price” means exactly that – an “initial” one, it’s not a price level at which we suggest closing positions. If this becomes the case (like it did in the previous trade) we will refer to these levels as levels of exit orders (exactly as we’ve done previously). Stop-loss levels, however, are naturally not “initial”, but something that, in our opinion, might be entered as an order.
Since it is impossible to synchronize target prices and stop-loss levels for all the ETFs and ETNs with the main market that we provide this level for (crude oil), the stop-loss level and target price for popular ETN and ETF (among other: USO, DWTI, UWTI) are provided as supplementary, and not as “final”. This means that if a stop-loss or a target level is reached for any of the “additional instruments” (DWTI for instance), but not for the “main instrument” (crude oil in this case), we will view positions in both crude oil and DWTI as still open and the stop-loss for DWTI would have to be moved lower. On the other hand, if crude oil moves to a stop-loss level but DWTI doesn’t, then we will view both positions (in crude oil and DWTI) as closed. In other words, since it’s not possible to be 100% certain that each related instrument moves to a given level when the underlying instrument does, we can’t provide levels that would be binding. The levels that we do provide are our best estimate of the levels that will correspond to the levels in the underlying assets, but it will be the underlying assets that one will need to focus on regarding the sings pointing to closing a given position or keeping it open. We might adjust the levels in the “additional instruments” without adjusting the levels in the “main instruments”, which will simply mean that we have improved our estimation of these levels, not that we changed our outlook on the markets.
Thank you.
Nadia Simmons
Forex & Oil Trading Strategist
Przemyslaw Radomski, CFA
Founder, Editor-in-chief
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