Trading position (short-term; our opinion): No positions are justified from the risk/reward perspective.

On Tuesday, crude oil gave up some gains after news that Rosneft (the leader of Russia's petroleum industry) will not cap oil production as part of a possible agreement with OPEC. Additionally, the U.S. dollar climbed to its highest level since March, making crude oil less attractive for buyers holding other currencies. In these circumstances, light crude lost 1.09% and slipped to late Jun highs. Will we see an invalidation of a breakout above these levels and further deterioration in the coming days?

Let’s jump into the charts below and find out what can we infer from them about crude oil’s futures moves (charts courtesy of http://stockcharts.com).

From today’s point of view, we see that the red resistance zone marked on the weekly chart continues to keep gains in check. Additionally, the key resistance level based on the 2016 peak triggered a pullback, which took the commodity to the late Jun highs. Taking this fact into account and combining it with a sell signal generate by the Stochastic Oscillator, we believe that our yesterday's commentary remains up-to-date:

(…) What’s next? We believe that as long as there won’t be a confirmed breakout above the Jun high a reversal and lower values of crude oil are very likely – especially when we factor in the fact that there are negative divergences (between the RSI CCI, Stochastic Oscillator and the price of the commodity) and a sell signal generated by the Stochastic Oscillator (not strong yet, but still).

Nevertheless, to have a more complete picture of the commodity, we decided to examine two of our ratios. What are they saying about future moves? Let’s start with the oil-to-oil stocks ratio.

(...) although the ratio moved higher and broke above the upper border of the blue consolidation, the key red resistance zone (based on the Dec 2014 gap) continues to keep gains in check. Therefore, we think that even if the ratio increases slightly from here, as long as there won’t be a breakout and a weekly closure above the upper border of the zone (which is currently reinforced by the neck line of a potential reverse head and shoulders formation) further rally is not likely to be seen and another reversal is very likely (not only in the case of ratio, but also in the case of crude oil as strong positive relationship remains in play).

Finishing today’s alert, we would like to take a closer look at the non-USD (WTIC:UDN ratio) chart of crude oil.(…)

(...) although the ratio extended gains and broke above the Jun high (the breakout is unconfirmed), the 38.2% Fibonacci retracement (based on the entire Aug 2013-Feb 2016 downward move) continues to keep gains in check. This suggests that only a confirmed breakout above this resistance would open the way to higher levels. Until this time, another reversal should not surprise us. If we see such price action, light crude (priced in the U.S. dollars) will also reverse and correct the recent upward move in near future.

Summing up, crude oil extended gains and almost touched the upper border of the key resistance zone - the Jun high of $51.67. Although this is a positive signal, a sell signal generated by the Stochastic Oscillator in combination with negative divergences between other indicators and the price of the commodity and the current picture of the oil market that emerges from our ratios suggests that the space for gains is limited and reversal is just around the corner.

Very short-term outlook: mixed with bearish bias
Short-term outlook: mixed
MT outlook: mixed
LT outlook: mixed

Trading position (short-term; our opinion): No positions are justified from the risk/reward perspective. However, if crude oil invalidates the breakout above the barrier of $50, we'll consider opening short positions. 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, Gold & Silver Fund Manager

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