Trading position (short-term; our opinion): Short positions (with a stop-loss order at $52.52 and the initial downside target at $45.80) are justified from the risk/reward perspective.

On Thursday, the black gold lost 2% after investors digested the EIA report and reacted to the increase in crude oil production. Thanks to these circumstances, light crude not only erased Wednesday’s gains, but also came back below the lower border of the trend channel. What does it mean for the commodity?

Crude Oil’s Technical Picture

Let’s take a closer look at the charts and find out (charts courtesy of http://stockcharts.com).

Quoting our yesterday’s Oil Trading Alert:

(…) crude oil (…) climbed above the lower border of the purple rising trend channel, invalidating the earlier breakdown. But is this move as positive as it looks at the first sight?

In our opinion, it is not, because this is a repeat of what we already saw on Friday. Why? Although the commodity invalidated the breakdown, yesterday’s move materialized on smaller volume than earlier declines, which raises doubts about oil bulls’ strength once again. What’s interesting, the size of volume, which accompanied Wednesday’s increase, was even smaller than what we saw on Friday. This suggests that we’ll likely see another downswing and a breakdown under the lower line of the trend channel in the very near future (maybe even later in the day).

From today’s point of view, we see that the situation developed in tune with our yesterday’s scenario and crude oil invalidated the earlier breakout above the lower border of the purple rising trend channel once again. Thanks to yesterday’s decline crude oil not only erased Wednesday’s gains, but also closed the day below the lower purple line, which is a bearish development.

What’s interesting, Thursday’s move materialized on visibly higher volume than Wednesday’s increase, which confirms oil bears’ strength and suggests that further deterioration is just around the corner. On top of that, the sell signal generated by the weekly Stochastic Oscillator remain in place, while the daily Stochastic Oscillator generated additional sell signal yesterday, giving oil bears another reason to act.

Taking all the above into account, we think that even if crude oil rebounds once again and test the lower border of the purple rising trend channel, another bigger move will be to the downside.

How low could the commodity go in the coming week?

We believe that the best answer to this question will be the quote from our Wednesday’s Oil Trading Alert:

(…) In our opinion, if crude oil declines from current levels, the first downside target will be the recent low, the 50-day moving average and the 50% Fibonacci retracement (around $46.32-$46.60). However, if this support area is broken, we’ll see further deterioration and a test of the late July low of $45.40 and the 61.8% Fibonacci retracement in the following day(s).

Summing up, profitable short positions continue to be justified from the risk/reward perspective as crude oil invalidated the earlier breakout above the lower border of the purple rising trend channel and closed the day under this line once again. Additionally, yesterday’s decline materialized on higher volume than earlier upswing, which increases the probability of another move to the downside in the coming days.

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 (already profitable) positions (with a stop-loss order at $52.52 and the initial downside target at $45.80) are justified from the risk/reward perspective. We will keep you – our subscribers – informed should anything change.

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

Gold & Silver Trading Alerts
Forex Trading Alerts
Oil Investment Updates
Oil Trading Alerts