Trading position (short-term; our opinion): Small speculative short position in crude oil with a stop-loss order at $70.22 and the initial downside target at $60.12 is justified from the risk/reward perspective.
In yesterday’s Oil Trading Alert, we explained why the black gold might have not done rallying yet and why another daily upswing seemed to be in the cards. And it happened. Crude oil moved to the target that we outlined, broke it by 6 cents and then declined. What’s next? Is the sideways trading definitely over?
Well, there are no certainties in any market, but since crude oil reached its target and it happened at the apex of the rising wedge pattern, a turnaround seems to be a very likely outcome. Let’s take a closer look at the chart for details.
In yesterday’s alert, we wrote the following:
Based on the apex of the rising wedge, it seems more likely that the true reversal will take place today, but yesterday’s move higher was so close to the rising, green resistance line that waiting for opening the short position would really be pushing our luck to the maximum. They say that it’s most difficult to let go of the last few cents of a trade and we did just that. We maximized the chance of entering the trade at all (and we did) at the expense of not entering at the exact top, but still very close to it (that is if crude oil is going to decline after reaching the rising green line ).
The rising green line is currently at about $67.1, so that’s where crude oil could move today and please note that such a move would not have any bullish implications – it would be a natural part of the pattern that we described previously.
Indeed, the price of black gold moved just a few cents above the above-mentioned price level and then retraced back below it. Since the target was reached, it seems that the top is in.
As far as the time factor is concerned, the apex of the triangle was yesterday, but some may say that it was relatively close to today’s session, so perhaps we will see another attempt to move higher within the next several hours. And they would be right – it might be the case, but it doesn’t have to be. Since we know how volatile the late-May decline was, we know that it can happen again. After all, the moves that precede consolidations are quite usually similar to the moves that follow them. Consequently, it might be better to be a day or two too early than to be just an hour or two late.
The volume that accompanied yesterday’s move higher was relatively low, which serves as a bearish confirmation and something that further validates our trade. It’s tempting to increase the size of the short position, but it seems more prudent to wait for either a reversal or a weekly closing price that might tell us more about the outlook for the upcoming week. If anything regarding this week’s candlestick becomes apparent before the end of today’s session and the implications become either significantly more or significantly less bearish, we’ll send you a follow-up message.
As far as the bigger picture for crude oil is concerned, yesterday’s session didn’t change anything.
Summing up, it’s likely that a top in the price of crude oil is in or extremely close to being in and in the light of the good possibility of the decline starting in a volatile manner, we view the speculative short position as justified from the risk to reward point of view.
Trading position (short-term; our opinion): Small speculative short position in crude oil with a stop-loss order at $70.22 and the initial downside target at $60.12 is 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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