Trading position (short-term; our opinion; levels for crude oil's continuous futures contract): Speculative short positions in crude oil with $12.13 as the binding profit-take level, and $21.56 as the stop-loss level.
The most crazy part of this year's crude oil trading might be already behind us and with the volatility declining a bit - and crude oil decisively above $10, it seems that we could leave the USO ETF for a while and return to our regular futures perspective for the black gold analysis.
Looking at the daily chart of crude oil futures, we see that the bulls managed to extend earlier gains, which resulted in a climb to the previously broken red zone created by the March lows. Although the futures rose above the late-March low on Friday, they failed to move higher earlier today as the week started with the orange bearish gap.
Additionally, when we take a closer look at the above chart, we can notice that the recent rebound pushed futures to the short-term red dashed resistance line based on the previous peaks, which suggests that as long as it remains in the cards, the bears have an additional ally in the red resistance zone area.
On top of that, when we zoom in our picture and focus on the 4-hour chart, we can see several more bearish factors. Let's check the chart below to find out.
From this perspective, we see that the crude oil futures tried to break above the above-mentioned red resistance line, but all Friday's attempts failed. This shows that the bulls are struggling at this area - invalidations of the earlier tiny breakouts didn't bode well for higher values of the futures.
Additionally, the futures reached the 61.8% Fibonacci retracement (based on the entire March-April decline slightly above the mentioned red resistance line), which gave the sellers an additional reason to act during Friday's session.
In this way, market participants created a pink resistance area based on the retracement and Friday's highs, which together with the red declining resistance line serves as the nearest resistance.
As we mentioned earlier, the crude oil futures opened today with the orange gap, which resulted in a drop below the red resistance line and an invalidation of the earlier tiny Friday's breakout, which suggests that further deterioration may be just around the corner - especially when we factor in the sell signals generated by the 4-hour indicators.
How low could the futures go if the situation develops in tune with our assumptions?
In our opinion, the first downside target for the bears would be around $16.46-$16.82, where the bottom of the Thursday's correction and the 38.2% Fibonacci retracement (based on the recent upward move) are.
However, if this support area is broken, the next target would be around $15.20-$15.40, where the next green support area (created by two important Fibonacci retracements and the bottom of the Wednesday's correction) and probably the lower border of the green rising wedge would intersect.
Moreover, in case the decline becomes very volatile, we might - at least very briefly - see the re-test of the previous lows. While crude oil continuous futures might not slide all the way down below $7, they could still decline to the second bottom at about $10. The 61.8% Fibonacci retracement based on the most recent rally is at about $12, so we'll put our binding profit-take level slightly above this level. At the same time, we would like to stress that this doesn't mean that we will neither adjust this level, nor that we will definitely wait until crude oil gets there to exit the position. If the risk to reward ratio becomes less favorable, we'll exit the position at that time.
Summing up, the outlook for crude oil has deteriorated based on the resistance levels reached and on the 4-hour indicators. It seems that we might see another downturn relatively soon. Consequently, we are opening speculative short positions. At the moment of writing these words, crude oil is trading at $19.27, so the stop-loss level for the current trade is relatively close and the risk seems relatively low (compared to our previous trades).
Trading position (short-term; our opinion; levels for crude oil's continuous futures contract): Speculative short positions in crude oil with $12.13 as the binding profit-take level, and $21.56 as the stop-loss level.
Thank you.
Nadia Simmons
Day Trading and Oil Trading Strategist
Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager
