Trading position (short-term; our opinion): Long positions (with a stop-loss order at $41.39 and initial upside target at $49.53) are currently justified from the risk/reward perspective.
On Wednesday, the black gold moved sharply lower after the market’s open weakened by another increase in crude oil inventories. Despite this deterioration, oil bulls pushed the commodity higher in the following hours, which resulted in a 0.64% gain and invalidation of two breakdowns. What does it mean for light crude?
Yesterday, the U.S. Energy Information Administration reported that crude oil inventories increased by 2.4 million barrels in the week ended November 4, missing analysts' expectations. However, this increase was smaller than a growth of 4.4 million barrels reported by API, which in combination with a decline in gasoline inventories (they decreased by 2.8 million barrels) and distillate supplies (a drop of 1.9 million barrels) encouraged oil bulls to act and resulted in an invalidation of two breakdowns. Will this positive event trigger higher prices of the commodity in the coming days?
Let’s examine the chart below and try to find out (charts courtesy of http://stockcharts.com).
On Friday, we wrote the following:
(…) taking into account the fact that there are still no buy signals at the moment, it seems that crude oil could decline even to the next (and much stronger) support zone created by the 38.2% Fibonacci retracement (based on the entire Feb-Oct upward move), late Apr and early May lows, early Aug highs and Sep lows. This area is also supported by the 200-day moving average, which increases the probability of reversal and bigger rebound (in our opinion, to around the previously-broken red and black support/resistance lines) in the coming week.
Yesterday, we added:
(…) the most important events took place earlier today when Donald Trump surprised financial markets by winning the U.S. presidential election. Thanks to this news, crude oil futures extended losses and approached the Sep low, hitting an intraday low of $43.10. Although oil bulls pushed them higher in the following hours, they remain under yesterday’s high, which suggests that after the market’s open crude oil may also go lower and re-test the strength of the recent low and the 200-day moving average
From today’s point of view, we see that the situation developed in line with the above scenario and oil crude oil slipped to the green support zone and the 200-day moving average. As you see, this deterioration was very temporary (similarly to what we saw in the case of crude oil futures during the pre-market trading) and oil bulls pushed the commodity to Tuesday’s levels very quickly.
In this way, the black gold invalidated earlier small breakdown under the 200-day moving average and the 61.8% Fibonacci retracement, which in combination with the current position of the indicators (the RSI bounced off the level of 30, a buy signal generated by the Stochastic Oscillator remains in place, while the CCI is very close to generating a buy signal) suggests further improvement in the coming days.
On top of that, the size of volume that accompanied yesterday’s move was significant, which confirms that oil bulls are getting stronger. At this point it is worth noting that similar increases in the volume we saw on Sep 6 and Sep 28 (we marked them with green arrows). Back then, such events have triggered rallies, which increases the probability that we’ll see similar price action in the following days (even if crude oil corrects yesterday’s move a bit).
If this is the case, and light crude extends gains, we’ll likely see an upward move to (at least) around $48.33-$49.53, where the previously-broken red and black resistance lines are.
Taking all the above into account, we believe that opening long positions justified from the risk/reward perspective.
Summing up, crude oil moved higher and invalidated earlier breakdown under the 200-day moving average and the 61.8% Fibonacci retracement, which in combination with the current position of daily indicators suggests that higher prices of the black gold are just around the corner.
Very short-term outlook: bullish
Short-term outlook: bullish
MT outlook: mixed
LT outlook: mixed
Trading position (short-term; our opinion): Long positions (with a stop-loss order at $41.39 and initial upside target at -$49.53) are currently 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.
On an administrative note, unless there are very important developments in the market, there will be no alert tomorrow due to the Veteran's Day and the travel schedule of your Editor. The Monday's alert will be posted normally.
Thank you.
Nadia Simmons
Forex & Oil Trading Strategist
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager
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