Trading position (short-term; our opinion; levels for crude oil’s continuous futures contract): Short positions will become automatically justified from the risk to reward point of view, when crude oil futures move to $52.97. In this case, we will automatically view a short position with $55.62 as stop-loss and $28.12 as initial price target as justified.
On Friday (Jan. 22), crude oil declined below the rising support line and even though it rallied back up, it was unable to end the week back above the line.
Crude oil moved slightly higher in today’s (Jan. 25) pre-market trading, but it didn’t take the black gold back above the previously broken support line, which is now turning into resistance.
Is the situation already bearish enough to open short positions? I’m usually waiting to see three daily closes below a certain price level to say that the breakdown below it is confirmed. In this case, however, we saw a weekly close below the support line, which by itself can confirm a breakdown.
If it was the only thing that was going on right now, I would probably not open the short position here, however, it’s not the only thing that’s going on right now. The stock market appears to be topping or is very close to making the final top, and since crude oil tends to move together with the stock market (at least the big moves), we are in a situation where the weekly confirmation of the breakdown should be viewed as sufficient.
The bottoming USD Index also provides bearish context for crude oil:
Given how ugly the situation might become in the stock market, and how bullish the situation might turn out in case of the USD Index, I don’t see a prolonged uptrend in crude oil prices from here. The biggest opportunity is likely to be in catching the next wave down, but if crude oil proves that it can really be strong in the short run, we might want to catch this short-term move to.
It’s all based on the risk to reward relation – if enough factors point to the same direction, opening a trade might be a good idea, even if it is against the bigger trend. The “don’t fight the trend” rule is useful, but one needs to keep in mind that there are multiple trends in place at the same time – the short-term trend can be different than the medium-term one, and the same goes with the long-term one (or immediate-term one).
To summarize, it seems that crude oil might have already started its next big move lower, and we plan to re-open the short positions in it, once it moves slightly higher.
As always, we’ll keep you, our subscribers well informed.
Trading position (short-term; our opinion; levels for crude oil’s continuous futures contract): Short positions will become automatically justified from the risk to reward point of view, when crude oil futures move to $52.97. In this case, we will automatically view a short position with $55.62 as stop-loss and $28.12 as initial price target as justified.
Thank you.
Przemyslaw Radomski, CFA
Founder, Editor-in-chief
