Trading position (short-term; our opinion): Small speculative short position in crude oil with a stop-loss order at $70.22 and the initial downside target at $60.12 is justified from the risk/reward perspective.
In yesterday’s Oil Trading Alert, we explained what conditions had to be met in order to create a good trading opportunity and we described how to prepare for it in advance. And since we saw the trigger later that day, the position was automatically opened. What’s next? Is the sideways trading definitely over?
As odd as it may seem, it may not be the case and we may have a day or two of more back and forth trading. Still, the price of crude oil is already so close to its target that it doesn’t seem to make sense to wait before entering the trade. After all, we are likely to either see prices that are higher by just a little (less than a dollar) or prices that are lower by a lot (definitely more than a dollar). This creates a situation in which being a bit too early is much better than being a bit too late and thus having a small short position seems justified. Let’s take a look at crude oil’s short-term chart for details.
In yesterday’s alert, we wrote the following:
First of all, the price of crude oil has almost reached the lower border of its previous rising trend channel, which was our target for this very short-term rally. Secondly, yesterday’s upswing was accompanied by low and declining volume, which means that a bigger decline is just around the corner and that the current move higher is just a pause.
But, this doesn’t necessarily imply that the top is already in. It could be a couple of days away based on the apex of the rising triangle that we marked with blue, dashed lines. It’s more of a wedge than a triangle, but the implications remain the same. The moment at which the lines cross is likely to be a reversal, and thus we are likely to see one shortly – either today or tomorrow. Since the rising green line was almost reached, it seems quite likely that crude oil will make another attempt to move to it.
Since we saw several bearish confirmations in light of small daily upswings on low and declining volume, it seems justified to schedule opening a short position right away, without waiting for a specific confirmation. Naturally, if we see the latter, we’ll likely increase the size of the position.
Based on the apex of the rising wedge, it seems more likely that the true reversal will take place today, but yesterday's move higher was so close to the rising, green resistance line that waiting for opening the short position would really be pushing our luck to the maximum. They say that it’s most difficult to let go of the last few cents of a trade and we did just that. We maximized the chance of entering the trade at all (and we did) at the expense of not entering at the exact top, but still very close to it (that is if crude oil is going to decline after reaching the rising green line).
The rising green line is currently at about $67.1, so that’s where crude oil could move today and please note that such a move would not have any bullish implications – it would be a natural part of the pattern that we described previously.
Summing up, we saw several bearish signs in the form of subsequent small rallies on declining and relatively low volume and it seems that entering a small speculative short position yesterday was justified from the risk to reward point of view. If we see a confirmation (and we likely will), we are most likely going to increase the size of the position, but we are not doing so right now.
Trading position (short-term; our opinion): Small speculative short position in crude oil with a stop-loss order at $70.22 and the initial downside target at $60.12 is justified from the risk/reward perspective. We will keep you – our subscribers – informed should anything change.
Thank you.
Nadia Simmons
Forex & Oil Trading Strategist
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager
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