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.

Although crude oil gained 0.93% on Friday, the black gold closed the previous week 1.62% below the August 18 closing price and under the lower border of the trend channel. Will we finally see another bigger move to the downside in the coming week?

Crude Oil’s Technical Picture

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

Looking at the medium-term chart, we see that crude oil remains under the green and purple resistance lines. Additionally, the black gold closed another week under the previously-broken 50-week moving average, increasing the probability of further declines. This pro bearish scenario is also reinforced by the sell signal generated by the Stochastic Oscillator and the size of volume, which accompanied last week’s drop (it was visibly higher than a week earlier, which confirms oil bears’ strength).

How Friday’s price action affect the very short-term picture of the commodity? Let’s examine the chart below and find out.

Looking at the daily chart, we see that crude oil moved a bit higher on Friday, but did this increase change anything in the overall picture of light crude? In our opinion, it didn’t. Why? As you see on the chart, oil bulls didn’t even manage to push the price of crude oil to the lower border of the purple rising trend channel, which is a sign of weakness.

Additionally, the size of volume which accompanied Friday’s upswing was much smaller (compared to the volume during Thursday’s decline), which increases the probability of another reversal – similarly to what we saw in the recent weeks.

On top of that, the sell signal generated by the Stochastic Oscillator remain in place and light crude is still trading below the lower border of the purple rising trend channel, which means that an invalidation of the breakout above this line and its potential negative impact on the price are still in effect, supporting oil bears and another attempt to move lower in the coming days.

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 closed another day below the lower border of the purple rising trend channel and another week under two medium-term important resistance lines and the 50-week moving average. Additionally, Friday’s upswing materialized on smaller volume than Thursday’s decline, which increases the probability of another move to the downside in the coming days.

Very short-term outlook: bearish
Short-term outlook: bearish
MT outlook: mixed
LT outlook: mixed

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. We will keep you informed should anything change, or should we see a confirmation/invalidation of the above.

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

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