Trading position (short-term; our opinion): Short positions (with a stop-loss order at $56.45 and an initial downside target at $45.81) are justified from the risk/reward perspective.

On Friday, crude oil moved higher once again after the International Energy Agency said that global supply and demand is falling into balance. Thanks to this news, light crude climbed to $54 and reached the resistance. Will it stop oil bulls once again?

Let’s examine the charts below to find out (charts courtesy of http://stockcharts.com).

On the weekly chart, we see that the situation in the medium term hasn’t changed much as crude oil is still trading in a narrow range between the previously-broken long-term red line and the red gap, which continues to keep gains in check since the beginning of the year. Taking this fact into account, we believe that as long as there is no breakout above this key resistance another downswing is very likely.

Having said the above, let’s check how Friday’s increase affected the very short-term picture of the commodity.

Quoting our previous commentary:

(…) crude oil extended gains and invalidated the earlier breakdown under the orange declining resistance line, which (…) suggest further improvement – similarly to what we saw in similar cases in the previous weeks.

How high could crude oil go? In our opinion, the space for increases is limited, because not far from yesterday’s levels is the red resistance line based on the January and February peaks. Additionally, slightly above this line is also the red resistance zone, which successfully stopped oil bulls several times in past weeks.

Looking at the daily chart, we see that the situation developed in line with the above scenario and crude oil reached our upside target. What’s next? Taking into account the proximity to the red resistance line based on the January and February peaks and the red resistance zone based on the previous highs, we continue to believe that as long as this area holds further rally is not likely to be seen and another reversal is more likely than not.

This scenario is also supported by the current situation in the oil-to-oil stocks ratio. Let’s take a closer look at the chart below.

Looking at the weekly chart, we see that although the ratio extended gains in the previous week, the long-term red declining resistance line (based on the June and October highs) together with the red resistance zone stopped oil bulls once again. Taking this fact into account, we believe that as long as there are no breakout and a weekly closure above the upper border of the zone (which is currently reinforced by the blue resistance line based on the previous highs) further rally is not likely to be seen and another reversal is more likely than not (not only in the case of ratio, but also in the case of crude oil as strong positive relationship remains in play).

Summing up, short positions continue to be justified as crude oil remains under the red resistance zone created by the recent highs and the red gap marked on the weekly chart, which together continue to keep gains in check since the beginning of the year. Additionally, the pro bearish scenario is also reinforced by the current situation in the oil-to-oil stocks as the key resistance zone supports oil bears and another attempt to move lower.

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

Trading position (short-term; our opinion): Short positions (with a stop-loss order at $56.45 and an initial downside target at $45.81) 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.

Thank you.

Nadia Simmons
Forex & Oil Trading Strategist
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager

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