Trading position (short-term; our opinion; levels for crude oil’s continuous futures contract): Full (100% of the regular position size) speculative short positions in crude oil are justified from the risk to reward point of view stop loss $45.63 at and $30.22 as the initial target price.
Crude oil started this week with a bearish price gap and a breakdown below the September and October lows. This is an extremely valuable indication. The black gold seems to have finally decided what the next big move is going to be, and by breaking lower, it effectively “agreed” with our expectations.
On its own, the breakdown is very bearish. However, what preceded is equally important, as it shows that this move has much more potential than just a few-dollar drop.
First of all, crude oil stopped rallying after correcting approximately 61.8% of the previous 2020 decline, which means that it was quite likely a real top instead of a fake one that will be broken shortly.
Second, the initial decline was followed by a zigzag, which is a classic corrective pattern. Since the preceding move lower was to the downside, the end of the correction insinuates another decline.
Third, the Stochastic indicator is on a sell signal.
Finally, it’s all similar to what we’ve witnessed in Q1 2020, not just the breakdown in crude oil, but the fact that it had first corrected slightly above the 61.8% of the preceding decline and that stocks were forming a double-top pattern.
Of course, we’ll be aware of the final point (stock’s double top) only after they decline further. However, the shape of the price moves (lower part of the above chart) is already similar.
Furthermore, the Covid-19 cases are soaring once again as well. Even though the fear of the unknown is not present this time, the scale of the phenomenon is much greater, and thus, the emotional reaction is also getting more serious. The charts above reflect that perfectly. Just as it was the case in January and February, crude oil is the first to show weakness, but it’s definitely not the last to do so.
The USD Index has already confirmed its breakout and is rallying almost daily, so things do really look like they did in the first quarter of the year.
To summarize, for the upcoming weeks, the outlook for crude oil remains bearish.
As always, we’ll keep you, our subscribers well informed.
Trading position (short-term; our opinion; levels for crude oil’s continuous futures contract): Full (100% of the regular position size) speculative short positions in crude oil are justified from the risk to reward point of view stop loss $45.63 at and $30.22 as the initial target price.
In the future contracts that are more distant than the current contract, we think adding the premium (the difference between the July and other contracts) to both: stop-loss and initial target prices is justified.
Thank you.
Przemyslaw Radomski, CFA
Editor-in-chief
