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.
Yesterday, crude oil moved sharply higher, which resulted in a comeback above the previously-broken important support/resistance lines. Did this increase change the medium-term picture of black gold? Will the non-USD charts of crude oil give us valuable clues about future moves?
Non-USD Picture of Crude Oil
In today’s Oil Trading Alert, we’ll focus on the non-USD (WTIC:UDN ratio) chart of crude oil. As a reminder, UDN is the symbol for the PowerShares DB US Dollar Index Bearish Fund, which moves in the exact opposite direction to the USD Index. Since the USD Index is a weighted average of the dollar's exchange rates with world's most important currencies, the WTIC:UDN ratio displays the value of crude oil priced in "other currencies" (charts courtesy of http://stockcharts.com).
Looking at the long-term chart, we see that although the ratio broke above the upper border of the red consolidation in the previous month, the 38.2% Fibonacci retracement stopped oil bulls, triggering a pullback at the end of October.
Taking this fact into account and combining it with the medium-term picture below, we think that lower prices of crude oil are still ahead of us. Let’s take a look at the weekly chart.
On the above chart, we see that the combination of the red declining resistance line based on February and April highs, the 50-week moving average and the upper border of the green rising trend channel stopped oil bulls and encouraged their opponents to act. Additionally, the CCI and the Stochastic Oscillator generated the sell signals, increasing the probability of further declines in the coming week(s).
Why? As you see on the chart, many times in the past the sell signals generated by the medium-term indicators preceded bigger downward moves (or even huge – just like in 2015 or earlier this year), which suggests that the history will likely repeat itself once again and we’ll see another move to the downside later in October.
This scenario is also reinforced by the very short-term picture of the ratio.
From this perspective, we see that the ratio invalidated the earlier breakout above the 200-day moving average and the upper border of the green rising trend channel, which suggests lower prices in the coming week – especially when we take into account the sell signals generated by the indicators, which support oil bears.
What does it mean for crude oil priced in U.S. dollars? In our opinion, another move to the downside in the ratio will trigger one more move to the south in crude oil. Therefore, we think that short positions continue to be justified from the risk/reward perspective.
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.
The above analysis is based on our latest Oil Investment Update. Its full version includes much more details and is accompanied by scenario analysis and summary of key factors that are likely to affect crude oil in the coming weeks. Therefore, today we have a surprise for you - we decided to share our latest Oil Investment Update (our most comprehensive analysis of the black gold market) with everyone subscribing to our Gold & Silver Trading Alerts and/or Oil Trading Alerts. We hope you enjoy it. You can access it using the following link:
What’s next for Crude Oil in October?
Thank you.
Nadia Simmons
Forex & Oil Trading Strategist
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager
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