Trading position (short-term; our opinion): Short positions (with a stop-loss order at $54 and the initial downside target at $45.80) are justified from the risk/reward perspective.

Although black gold moved higher after the EIA showed a sharp decline in crude oil inventories, the price of the commodity reversed and declined on concerns about the heavy increase in crude oil exports. As a result, light crude slipped under the barrier of $50 and closed the day below it, invalidating the earlier breakout. Will we see further deterioration in the coming days?

Although the Energy Information Administration reported that crude oil inventories fell 6 million barrels in the week to Sept. 29 (easily beating analysts’ forecasts of the 756,000 barrels decrease), the report also showed that gasoline inventories rose by 1.64 million barrels and supplies in Cushing, Oklahoma, increased by 1.52 million barrels. Additionally, crude oil exports rose heavily to 1.98 million bpd, raising worries among investors that such increase could undermine the OPEC-led efforts to reduce supply. Thanks to these circumstances oil bears received another reason to act, but will they use it to push the price lower in the coming days?

Crude Oil’s Technical Picture

Before we know the answer to this question, let’s take a closer look at the charts below and check the technical picture of the commodity (charts courtesy of http://stockcharts.com).

Yesterday, we wrote the following:

(…) crude oil is trading under the long-term green resistance line based on August and November 2016 lows (marked on the weekly chart), the lower border of the purple rising trend channel and May peaks, which means that the last week’s invalidation of the breakout above these levels and its negative impact on the price are still in effect, supporting oil bears. Additionally, the sell signals generated by the daily indicators and the weekly Stochastic Oscillator remain in place, suggesting lower prices in the coming days.

(…) How low could crude oil go? If (…) crude oil declines from current levels, the initial downside target for oil bears will be around $49.85, where the previously-broken red declining line (which serves as the nearest support) is.

From today’s point of view, we see that the situation developed in line with our yesterday assumptions and crude oil extended losses yesterday. Thanks to this drop the commodity slipped under the green zone created by the August peaks and the barrier of $50, closing the day below them and invalidating the earlier breakout. This is a negative development, which together with the sell signals generated by the indicators suggests further deterioration in the coming days.

Nevertheless, taking into account the drop to the red declining line based on the February and April highs, it seems to us that black gold could rebound slightly before another move to the downside.

Finishing today’s Oil Trading Alert please note that yesterday’s drop materialized on higher volume than day earlier, which suggests that oil bears may getting stronger. If this is the case and we see a breakdown under the above-mentioned red line, oil bears will likely test the 38.2% Fibonacci retracement based on the June-September upward move (around $48.72) in the following days.

Summing up, short positions continue to be justified from the risk/reward perspective as crude oil extended losses on higher volume and invalidated the earlier breakout above the August peaks and the barrier of $50, which together with the sell signals generated by the indicators suggest that further deterioration is just around the corner.

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

Trading position (short-term; our opinion): Short positions (with a stop-loss order at $54 and the initial downside target at $45.80) are 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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