Trading position (short-term; our opinion): Long positions (stop loss at $37.23; initial upside target at $46.90) are justified from the risk/reward perspective.
Crude oil declined yesterday and that was the most visible daily downswing since the beginning of August – is this a start of another big downswing?
In short, that’s not very likely at this time. One important thing is today’s action – crude oil already erased about half of yesterday’s decline and the second important thing is the corrective nature of the USD’s decline in light of the recent crude oil – USD link. Let’s take a closer look (charts courtesy of http://stockcharts.com).
In the past few weeks crude oil and the USD Index have been moving in tune and both: tops and declines aligned with each other. This correlation is likely of short-term nature, just like it was the case previously (USD and crude oil previously had periods of high positive correlation, but it never held for months – at least not in the recent past), but it does have bullish implications for the following days. Just as it seems that the move lower in the USD Index was counter-trend in nature, the odds are that yesterday’s slide is just as temporary.
Why do we think the USD is headed higher? We discussed that in yesterday’s Gold & Silver Trading Alert:
Moving back to the USD Index, it moved to about 95.50 today – the early July low and more or less the 38.2% Fibonacci retracement level based on the May – July rally. Consequently, since 2 support levels were reached, the decline could be over or is very close to being over as today’s decline doesn’t invalidate the bullish outlook for the USD Index in the medium term.
The USD Index is still within an over-a-year-long consolidation after a huge run-up. It’s likely to break above the previous highs and start another powerful upleg – similar to the one seen in 2014 and 2015 – the moves that follow a consolidation tend to be similar to those that have preceded it.
What implications does this have for the crude oil market? It continues to have bullish implications for the following days and as long as the positive link between crude oil and the USD Index remains in place. They are both moving higher today, so the implications remain bullish.
Summing up, yesterday’s move lower seems to be correction within a short-term move higher and the USD – crude oil link seems to confirm it.
Very short-term outlook: bullish
Short-term outlook: bullish
MT outlook: bullish
LT outlook: mixed
Trading position (short-term; our opinion): Long positions (with a stop loss order at $37.23 and initial upside target at $46.90) 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, Gold & Silver Fund Manager
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