Oil has indeed plunged yesterday, yet caught a bid earlier today on the news of the downed Iranian drone. While that's encouraging to the bulls, they didn't celebrate the following upswing for too long. Time to consult the charts instead of scanning the headlines for the odds of the next move. How do they stand right now, and what kind of trading action they call for?
Let's take a closer look at the charts below (charts courtesy of http://stockcharts.com and www.stooq.com ).
Our yesterday's Alert was titled "Yes, Lower Prices Rule the Day As Oil Plunges Unabated" in response to our Wednesday's rhetorical title of "Are Even Lower Oil Prices Ahead of Us?" Prior to the yesterday's oil lows, we wrote these words on Wednesday:
(...) Crude oil has finished yesterday's session sharply lower, slipping below $58 and making our short position even more profitable. That also marks a close below the 50-day moving average, which is another bearish factor to boot.
The volume comparison also speaks loudly - increasing volume of the downswing attests to the bears' strength and involvement. Both the CCI and the Stochastic Oscillator have generated their sell signals, lending further support to the bears.
Crude oil went on to extend losses during yesterday's session, making our short positions even more profitable.
Initially, the commodity moved higher and approached the previously-broken 50-day moving average. Such price action looked to the bears like a verification of the earlier breakdown and encouraged them to act.
Crude oil then broke below its previous lows, closing the day below them. This is a bearish development, also when viewed from the volume comparison perspective. Yesterday's decline materialized on visibly higher volume, confirming the sellers' strength and suggesting further deterioration in the coming day(s).
The sell signals generated by the daily indicators remain on the cards, supporting another attempt to move lower.
Let's see how today's action in the crude oil futures looks like.
Earlier today, the futures opened higher with a gap, and an upside move followed. It reached as high as the early-June lows that were broken during yesterday's session.
Is it positive development? Not yet. As long as there is no invalidation of the breakdown, further deterioration remains likely - especially when we factor in the bearish position of the daily indicators and yesterday's volume. And indeed, the upswing attempt looks to have fizzled out and black gold trades at around $55.50 currently.
How low could the crude oil futures fall if they extend losses? The next downside target for the bears will be around $54.58, which is where the 61.8% Fibonacci retracement is.
Summing up, oil has plunged yesterday, and the increased volume attests to the strength of the bears' involvement. Similarly to the power of the red resistance zone and the 61.8% Fibonacci retracement that we saw earlier this week, the 50-day moving average acted the same way yesterday, sending black gold even lower. The bearish divergences (between the CCI and oil prices, and between the Stochastic Oscillator and oil prices) are still being resolved to the downside. Earlier today, the bullish gap higher in the oil futures encouraged the bulls to act, yet their upswing attempt has been already erased. While the above support the bears and the short position remains justified, we have decided to adjust the trade parameters to protect a sizable part of earlier gains and cash in on a likely upcoming spike lower.
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Thank you.
Nadia Simmons
Forex & Oil Trading Strategist
Sunshine Profits - Tools for Effective Gold & Silver Investments
