Trading position (short-term; our opinion): No positions are justified from the risk/reward perspective.

On Wednesday, oil bulls closed their ranks and moved northwards at the very beginning of the session. The following hours passed and the march to higher levels continued. Finally, the day ended more than 3% above Tuesday's closure, but can we treat yesterday’s upswing as a success?

Let’s analyze the charts below (charts courtesy of http://stockcharts.com).

The first thing that catches the eye on the weekly chart is an invalidation of the earlier breakdown under the long-term green rising support line. Is this a positive even? Yes. But can we trust it? In our opinion, no. Why?

Because although oil bulls invalidated Tuesday’s breakdown please keep in mind that the week is not over yet and until we see a weekly closure above this line, we should treat yesterday's event with moderate optimism.

How yesterday’s rebound affected the short-term perspective?

From this perspective, we see that the implementation of the pro-declining scenario (about which we wrote more in our previous alerts) satisfied the bears so much that they ceased further attacks during yesterday's session.

Thanks to these circumstances, their rivals took action and wiped out more than half of Tuesday's fall. Despite the fact that this attitude of the buyers looks quite promising, unfortunately, also in the case of this chart, we think that the bulls have no reasons for joy and celebration yet. Why?

First, although the commodity moved higher and gained over 3% during yesterday’s session, light crude is still trading not only under the previously-broken lows, but also well below the very short-term blue declining resistance line, which succesfully stopped the buyers many thimes earlier this month.

Such price action suggests that as long as there is at least an invalidation of the drop below late-November and December lows, all upswings can be nothing more than just verifications of the earlier breakdown.

Second, yesterday’s move to the upside materialized on smaller volume than Tuesday’s drop, which raises some doubts about the bulls’ strngth.

Third, the sell signal generated by the Stochasic Oscillator continues to support the sellers and ower values of light crude in the coming days.

Taking all the above into account, we believe that, as we wrote above, that until black gold is trading below the previous lows, one more move to the south can’t be ruled out.

How low can the commodity go if oil bears show their claws once again?

We believe that the best answer to this question will be the quotes from our last alert:

(…) In our opinion, if the commodity extends losses from current levels, crude oil will test (at least) the green support zone based on the late-July and late-August lows (around $45.40-$45.62) in the very near future.

At this point, it is worth noting that in this area there is one more additional support, which can encourage the buyers to act. What do we mean by that? Let’s take a look at the long-term chart below.

From this perspective, we see that not far from current levels (inside the above-mentioned support area) oil bears will have to face with the 61.8% Fibonacci retracement based on the entire 2016-2018 upward move.

Nevertheless, if oil bulls do not stop them there, the way to June 2017 lows (around $42.05-$43.16) will be open.

Summing up, although crude oil rebounded and erased over half of Tuesday’s decline, oil bulls didn’t even reach the previously-broken lows, which suggests that as long as the price of black gold remains below them, one more move to the south and a test of our next downside targets is likely.

Trading position (short-term; our opinion): No positions 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.

Thank you.

Nadia Simmons
Forex & Oil Trading Strategist
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager

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