Trading position (short-term; our opinion; levels for crude oil’s continuous futures contract): No positions are justified from the risk to reward point of view.

Crude oil moved higher once again today (Feb. 4), and it rallied above its February 2020 high. This means that the outlook became less bearish for the short term and it seems that crude oil might rally even higher before topping and turning south.

Unfortunately, this means that our previous short position was closed. Still, let’s keep in mind that the profits made on the 2020 decline were way bigger than any unprofitable trading attempts to get back on the short side of the market in the recent months. The latter were much smaller.

So, what’s next? Crude oil might theoretically move even higher here, and the next strong resistance is at the 2020 high, above the $60 level. However, even though this rally is possible given the current breakout, I wouldn’t call it as particularly likely.

The USD Index is breaking higher while the stock market seems to be topping here.

In fact, it could be the case that the link between stocks and crude oil is the most important one. Unlike stocks, crude oil is not above its 2020 highs, even though both are closely connected. After all, the black gold is the most versatile commodity on the planet, and all companies use it in one way or another (i.e., transport).

Now, if they are so tightly connected and one is obviously underperforming, it’s clear that this market has been relatively weak. And the thing about weak markets is that they tend to perform surprisingly well at the end of a given move. So, the strong performance of crude oil in recent days (it just moved to new highs even though the S&P 500 didn’t) might actually suggest that both: stocks and crude oil are forming medium-term tops.

Still, on a short-term basis it seems that we should wait for a better risk to reward ratio to re-enter the short positions than the one that we have right now. For instance, if crude oil invalidates the breakout above the Feb. 2020 high, we might re-enter this position.

To summarize, it’s likely that crude oil will decline in a major way, but its very short-term outlook is unclear at this time.

As always, we’ll keep you, our subscribers well informed.

Trading position (short-term; our opinion; levels for crude oil’s continuous futures contract): No positions.

Thank you.

Przemyslaw Radomski, CFA
Founder, Editor-in-chief