Trading position (short-term; our opinion): Short positions (with a stop-loss order at $54 and the initial downside target at $46) are justified from the risk/reward perspective.

On Thursday, crude oil lost 1.44% and invalidated the earlier small breakout above the resistance zone – similarly to what we saw in the previous month. What does it mean for black gold?

Crude Oil’s Technical Picture

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

Quoting our Wednesday alert:

(…) the commodity increased once again to the yellow resistance zone, which is the major resistance since the beginning of the year. (…) this area successfully stopped oil bulls in February, April, May and also in September, which means that as long as there is no breakout above it, the way to the higher prices will be closed and another reversal is just a matter of time (not too long time).

This scenario is also reinforced by the current position of the weekly indicators (the sell signal generated by the Stochastic Oscillator remains in play, while the CCI is close to generating it) and decreasing volume during increases.

Looking at the daily chart, we see that oil bears pushed the commodity a bit lower, which resulted in a comeback below the May peak.

How did this drop affect the very short-term picture? Let’s take a look at the daily chart and find out.

On Wednesday, we wrote the following:

(…) crude oil increased above the May high and the upper border of the red resistance zone based on it (…) there was a similar situation on September 25. However, back then, oil bulls created a big white candlestick, which materialized on visibly higher volume than yesterday’s move. Despite that upswing, the upper red resistance zone created by the April highs stopped further rally, triggering a bigger pullback.

What does it mean for light crude? As you see, yesterday’s candlestick has a small body with long shadows, which suggests indecision or the lack of clear domination of buyers or sellers, which could lead to a change of the very short-term trend – similarly to what we saw many times in the past (for example, on March 1, April 12, May 24, August 7, September 7 or September 26).

Additionally, the size of volume decreased on Tuesday compared to what we saw a day earlier, which suggests that buyers may be running out of steam.

Looking at the daily chart, we see that the situation developed in line with our assumptions and crude oil reversed and declined, invalidating the earlier small breakout above the red resistance zone – similarly to what we saw at the end of September.

Back then, such price action encouraged oil bears to act, which resulted in a decline below the barrier of $50. Taking this fact into account and combining it with the current situation in the medium term and the increase in volume during yesterday decline, we believe that further deterioration in the coming week is very likely.

If this is the case and light crude extends losses, the first downside target will be the blue support zone created by the August highs (around $50-$50.43).

Summing up, short positions continue to be justified from the risk/reward perspective as crude oil is still trading under the major resistance area, which successfully stopped increases many times earlier this year.

Very short-term outlook: bearish
Short-term outlook: bearish
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 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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