Trading position (short-term; our opinion): Small (half of the regular size) short positions (with a stop-loss order at $61.13 and the initial downside target at $52) are justified from the risk/reward perspective.

Although oil bulls pushed crude oil a bit higher after yesterday market open, the combination of resistance lines stopped them and triggered a pullback. Will oil bears extend losses in the following days?

Crude Oil’s Technical Picture

Before we answer these questions, let’s examine the technical picture of crude oil (charts courtesy of http://stockcharts.com).

Quoting our Friday alert:

(…) if oil bulls push the price of light crude higher, we can see an increase even to (…) the above-mentioned upper line of the black trend channel (…).

Will such price action change anything? (…) In our opinion, it won’t, because as long as black gold is trading under the upper line of the above-mentioned formation all upswings should be considered as nothing more than verifications of the Monday breakout.

Looking at the daily chart, we see that the situation developed in line with the above-mentioned scenario and crude oil verified the earlier breakdown under the upper line of the black trend channel yesterday. Thanks to the increase, which we saw after the market open, black gold also touched the upper line of the very short-term blue declining trend channel, which together with the above-mentioned verification of the breakdown triggered a bigger pullback in the following hours.

As a result, oil bears erased all Monday gains and created the bearish engulfing pattern on the daily chart, which doesn’t bode well for higher prices. How can we interpret this situation from the psychological point of view? Those traders, who had long positions decided to close them after an increase to the upper line of the trend channel, which resulted in a decline. Those who joined the last part of the upward move didn’t withstand the pressure and began to close their positions in fear of losses, which caused that the price of crude oil continued to fall.

Therefore, in our opinion, the bearish engulfing pattern is an additional signal for investors to open more short positions, which due to the absence of the opposite side (the previous ones who closed their positions due to fear of losses will not re-open them in the same direction) will push the price even lower in the coming week.

How low could crude oil go if oil bears show their strength in the coming days? In our opinion, if light crude extends losses from current levels, we’ll see (at least) a drop to around $54.81-$55.24, where the January peak, the mid-November lows and the lower border of the very short-term blue declining trend channel are. If this support area is broken, the way to lever levels will be open.

At this point it is worth nothing that the pro bearish scenario is also reinforced by the size of volume, which accompanied yesterday’s decline and the current situation in the medium term. Let’s take a closer look at the chart below.

From the broader perspective, we see that although crude oil rebounded at the beginning of the week, black gold pulled back, which resulted in a comeback under the 200-week moving average. Additionally, the current position of the indicators (the sell signals generated by the RSI and the Stochastic Oscillator remain in cards, while the CCI is getting closer to doing the same) also supports oil bears and lower prices of light crude in the near future.

Summing up, short positions continue to be justified from the risk/reward perspective as crude oil remains under the upper line of the black rising trend channel and invalidated the earlier breakout above the 200-week moving average. Additionally, the sell signals generated by the weekly indicators increase the probability of further declines in the coming week(s).

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

Trading position (short-term; our opinion): Small (half of the regular size) short positions (with a stop-loss order at $61.13 and the initial downside target at $52) are justified from the risk/reward perspective. We will keep you – our subscribers – informed should anything change.

As a reminder – “initial target price” means exactly that – an “initial” one, it’s not a price level at which we suggest closing positions. If this becomes the case (like it did in the previous trade) we will refer to these levels as levels of exit orders (exactly as we’ve done previously). Stop-loss levels, however, are naturally not “initial”, but something that, in our opinion, might be entered as an order.

Thank you.

Nadia Simmons
Forex & Oil Trading Strategist
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager

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