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.
Today's Oil Trading Alert is once again going to be very brief as the price of black gold has been trading back and forth since we posted the previous Oil Trading Alert, and it continues to trade below the entry level of our profitable short position. Crude oil's price is only 3 cents higher than it was when we were writing yesterday's Alert. This means that practically everything that we wrote previously remains up-to-date:
Crude oil moved above the previous highs and at the moment of writing these words, it's testing the upper border of the March price gap. And given the fundamental news that are reaching (and likely to reach) the market - the increasing Covid-19 cases in the U.S. and globally - it seems that black gold might not have enough strength to keep pushing higher.
The upper border of the March price gap is one of the most important resistance levels nearby. There's also the 61.8% Fibonacci retracement level, but since it's based on the April low that is relatively unclear (different series of futures contracts were trading at very different price levels, some were even in the negative territory), the Fibonacci retracement might not be as reliable as the price gap.
This means that the resistance level that is being tested right now, is of critical importance. Please note how aligned is the price of crude oil with the previous spending chart - and with the prices of stocks themselves.
Just several months ago, crude oil was one of the weakest markets out there, and its rebound was one of the strongest. The reversal in black gold and a decisive decline could be the thing that tips the scale for all markets.
Consequently, while a trigger is not necessary for the market to move in a given direction, getting one could speed things up. And it seems that crude oil's reversal could be the trigger, along with a comeback of the USD Index.
When based on the daily closing prices, the resistance created by the upper border of the March price gap is at $41.28, and at the moment of writing these words, crude oil is trading 14 cents above this level. This by no means implies that the resistance is broken. If we see a daily close above $41.28, it could have bullish implications, but it doesn't have them right now.
"Could", because if we look at crude oil's 4-hour chart, we'll get a slightly different picture.
In this case, the upper border of the huge March price gap is at $41.61, which means that crude oil is actually slightly below it, not above it. The intraday high (so far) was $41.55, which means that this resistance was not touched on an intraday basis.
The situation is developing in tune with the above, especially that the news (with emphasis on fear in general) make the situation even more similar to what we saw in March. Based on the Covid Tracking Project, the latest daily increase in the U.S. Covid-19 cases is about 39k, which is well above the previous high.
To be precise, the situation is not yet as severe as it was in April, because back then, the number of tests conducted was about half of what it is right now. Still, the breakout in nominal terms is likely to catch media's (and thus investors') attention. The next wave of big fear is likely to unfold in our view. And crude oil is likely to fall once again.
Summing up, the short-term outlook for crude oil is bearish based on the technical indications and based on the rapidly increasing Covid-19 cases in the U.S..
As always, we'll keep you - our subscribers - 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 case of the futures contracts that are more distant than the current contract, we think that adding the premium (difference between the July and other contracts) to both: stop-loss and initial target prices is justified.
Thank you.
Nadia Simmons
Day Trading and Oil Trading Strategist
Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager
