Trading position (short-term; our opinion): Short position with a stop-loss order at $68.54 and the initial downside target at $58.71 is justified from the risk/reward perspective.
Oil bulls suffered another setback yesterday. It looks like a bit too many setbacks in recent days. Each price recovery attempt since the last week of April has fizzled out. It looks like it's the case of Monday's upswing, too. Let's consult the technical picture while weighing the odds of the next move. How does it affect our open position?
Let's take a closer look at the chart below (chart courtesy of http://stockcharts.com).
After Monday's upswing, crude oil prices have declined yesterday. The overall situation hasn't changed much with yesterday's downswing, though. The combined power of the 200-day and 50-day moving averages continues to keep declines in check for now.
Why do we say "for now"? Volume provides a subtle hint. The volume value accompanying yesterday's decline was visibly higher than the volume level we saw with the preceding upswing. This increasing commitment of the bears raises the probability of another downswing in the near future.
Therefore, Monday's upswing looks like a verification of the breakdown below the red horizontal resistance line that is based on mid-April lows. The daily indicators support the case for the next decline. Indeed, black gold trades at around $61.20 at the moment of writing these words.
The first half of the below quotation from yesterday has proved spot on and the other half remains up-to-date also today:
(...) if oil moves down from here, we'll likely see another test of the 200- and 50-day moving averages. Such a test would then be likely followed by a drop to the first green support zone or even the 38.2% Fibonacci retracement.
Summing up, the outlook for oil remains bearish. Monday's reversal has been erased and the bears look to be holding the upper hand. This view is confirmed by the increased volume of yesterday's downswing and the indicators. This is what happens after verifying a breakdown - and we have had a verification of the breakdown below the red horizontal resistance line that's based on mid-April lows. The short position continues to be justified.
Trading position (short-term; our opinion): Short position with a stop-loss order at $68.54 and the initial downside target at $58.71 is justified from the risk/reward perspective.
Thank you.
Nadia Simmons
Forex & Oil Trading Strategist
