Trading position (short-term; our opinion; levels for crude oil's continuous futures contract): Full (100% of the regular position size) speculative short positions in crude oil are justified from the risk to reward point of view stop loss $45.63 at and $30.22 as the initial target price.
2020, what a year, right? Not to mention September, as one of the stormiest months for marketplaces in recent times. Restrictions of Fed's measurements, COVID-19 waves of infections, and USD fluctuations have all influenced the marketplace, not excluding crude oil in the process. And Indeed, the main catalyst behind crude oil's poor performance lies in the form of COVID-19 fears, as well as the USD's emergence as a safe haven. Not to even mention the upcoming U.S Presidential Elections and post-election fears.
Obviously, as we're about to end September, the crude oil price is unlikely to rise higher from the current figure soon. Considering last week's USDX breakout and its invalidation, it was understandable that the currency market's pressure against crude oil prices will persist. To put it briefly, the situation remains the same as yesterday, as crude oil continues to edge lower, and the USDX continues to make positive impulses.
If you've just signed up for our Premium Oil Trading Alerts to get a better sense of the ongoing trend, please read our analyses from September 18th and September 21st for more details.
Considering the individual currency pairs' situation of the euro and the yen in previous weeks, the invalidation's bearish implications remain slightly surprising. For a better context, let us refer to what we've said previously about the USDX approximately two weeks ago, on September 18th, along with the corresponding chart:
Namely, the USDX invalidated its breakout, which is clearly a bearish sign. Quite visibly, the USDX was above the declining resistance line, but it failed to hold these gains. In July, a failure to rally above resistance meant another big downturn, which translated into higher crude oil prices.
So, the question is, do the USDX and crude oil are after the same fate in the near future? Not necessarily.
The USD Index represents a weighted average of several currency exchange rates. The biggest weight (over 50%) is attributed to the euro exchange rate, and the second biggest weight is attributed to the yen exchange rate. Let's see how the situation looks like in both currencies.
The euro is after a breakdown and a verification thereof. It is a very bearish situation, and bullish one for the USD Index and. Because of that, at least in the short run, it is bearish for gold.
And what about the Japanese yen?
Turns out, as far as the implications are concerned, the situation is not that different. However, the direct reason for it is.
As you can see on the Japanese yen index chart above, for the past 1.5 years, it topped shortly and reversed its course whenever it tried to rally above the 95 levels.
The Japanese currency's implication can potentially invalidate the breakout once again. Therefore, history tends to rhyme, after all.
Given the suggestions that the individual currency exchange rates provide us with, should we really expect the USD Index's breakout invalidation to cause lower values? Not really. The individual currency exchange rates are more "basic", and their outlooks prevail the index chart that is essentially based on them.
In other words, the validity of the bearish implications of USDX's invalidation is suspicious.
The result is that the bearish outlook for crude oil didn't really change, even though we admit that it is not as bearish as it was before the USDX's breakout's invalidation.
Take the nominal price changes into consideration, and it's not that significant, right? But, if you take into account the critical breaking resistance, it's a whole different story.
In the light of the foregoing, we can establish that the USDX breakout from September 21st didn't manage to contour a crystal-bullish situation for the future. Due to the clear and significant move of the USD index above the declining resistance line, the situation remains more bullish and more bearish at the same time for the crude oil price.
As we've indicated in our analyses, the moves in the black gold price continue to push the boundaries of the substantial March price gap. The conclusion that a bullish outlook is not possible at this point remains valid because, until crude oil breaks above the upper border of March's price gap, the early-March lows, and the 61.8% Fibonacci retracement, it simply won't happen.
Undoubtedly, with no major changes expected today as well, crude oil still moves lower after approaching the resistance, which only validates the continuous bearish outlook.
To sum things up, for the upcoming weeks, the outlook for crude oil stays bearish, and the most recent upswing could not change that at all.
As always, we'll keep you, our subscribers well informed.
Trading position (short-term; our opinion; levels for crude oil's continuous futures contract): Full (100% of the regular position size) speculative short positions in crude oil are justified from the risk to reward point of view stop loss $45.63 at and $30.22 as the initial target price.
In the futures contracts that are more distant than the current contract, we think adding the premium (the difference between the July and other contracts) to both: stop-loss and initial target prices is justified.
Thank you.
Nadia Simmons
Day Trading and Oil Trading Strategist
Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager
