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.

On Tuesday, black gold lost 0.65% as concerns of another increase in crude oil stocks and a strengthening U.S. dollar affected negatively the price of the commodity. As a result, light crude closed the day under $52, but will oil bears push it lower in the coming days?

Crude Oil’s Technical Picture

Let’s take a closer look at the charts below and find out (charts courtesy of http://stockcharts.com).

Looking at the weekly chart, we see that crude oil moved a bit lower, which resulted in a drop under the previously-broken May peak (marked with the blue horizontal dashed line). In this way, the commodity invalidated earlier tiny breakout, which is a negative development (it will be bearish if we see a weekly closure under this level).

Taking into account the above and the fact that yesterday’s drop materialized on higher volume than earlier increases (it’s seen more clearly on the daily chart below), we believe that what we wrote on Tuesday remains up-to-date also today:

On the medium-term chart, we see that although crude oil extended gains, the commodity reached the previously-broken long-term green line, which looks like another verification of the earlier breakdown under this line.

(…) we can notice a similar situation at the end of July. Back then, this important resistance was strong enough to stop oil bulls and trigger declines in the following weeks - despite the fact that the indicators were at much lower levels than now. Additionally, the CCI and the Stochastic Oscillator increased recently to the levels that we saw at the beginning of the year - just before the start of the downward move, which increases the probability that reversal is just around the corner – especially when we factor in the fact that the size of volume is decreasing from week to week (this observation raises doubts about the strength of the rally).

And speaking about indicators…. when we focus on the daily RSI, we can see an interesting regularity.

(…) almost all RSI increases to around 70 since the beginning of 2016 have resulted in reversals in the following days (we marked then with blue vertical, dashed lines), which increases the probability that the history will repeat itself once again and crude oil will decline in very near future.

This scenario is also reinforced by the position of the CCI, the Stochastic Oscillator and the current situation in the oil-to-stocks ratio.

Relationship Between Crude Oil and General Stock Market

(…) although the ratio moved higher, it climbed to very important resistances – the upper border of the blue declining trend channel and the 50-week moving average, which together could stop bulls later this week and trigger a reversal.

What does it mean for light crude? Taking into account positive relationship between the commodity and the ratio, we think that declines the latter case will translate into downward move in the case of black gold – similarly to what we saw in the past.

Connecting the dots, we think that reversal in crude oil is very likely and to avoid unnecessary closure of our short position we decided to move the stop-loss order to $54 – slightly above the April high.

Summing up, short positions continue to be justified from the risk/reward perspective as crude oil invalidated the earlier tiny breakout above the May peak. Additionally, the commodity remains under the previously-broken long-term green line, which looks like another verification of the earlier breakdown. This scenrio is reinforced by the current position of the indicators, the size of volume, which accompanied recent incrreases and the current situation in the oilto-stocks ratio.

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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