Trading position (short-term; our opinion): Short positions (with the stop-loss order at $68.15 and the initial downside target at $56.57) are justified from the risk/reward perspective.

On one hand, Friday’s session was victorious for oil bulls, because thanks to their fight black gold gained 1.24%. On the other hand, the commodity climbed to important resistance, which stands on the way of higher levels. Will we see a verification of the earlier breakdown or rather further improvement?

Crude Oil’s Technical Picture

Let's take a look at the chart below (charts courtesy of http://stockcharts.com).

On Friday, we wrote the following:

(…) the price of crude oil broke above the Tuesday's peak and closed the day above the 50% Fibonacci retracement, which is a positive development.

What does it mean for oil bears? In our opinion, nothing more than information that we can see one more upswing and a test of the 61.8% Fibonacci retracement and the previously-broken lower border of the blue rising trend channel, which is slightly above it.

Looking at the above charts, we see that the situation developed in line with the above scenario and crude oil extended the rebound. Thanks to this increase the commodity climbed to our upside target - and the previously-broken lower border of the blue rising trend channel, which looks like a verification of the earlier breakdown.

This scenario is also reinforced by the volume, which accompanied recent increases. As you see on the charts, last week’s upward move materialized on visibly lower volume (compared to what we saw a week earlier) – not only in terms of weekly candlesicks, buy also on the daily basis, which increases doubts about the strength of the demand side and suggests that reversal is just around the corner.

If this is the case and black gols declines from current levels, we’ll see a downward move to at least February lows. However. whe we factor in the sell signals generated by the weekly indicators, it seems that crude oil could go even lower in the coming month.

Finishing today’s alert please keep in mind what we wrote on Friday about pro-bearish fundamental facors:

Fundamental Factors and Black Gold

In our opinion, the pro-bearish scenario is also reinforced by the fundamental factors. Yesterday’s EIA data showed that the U.S. output remains above 10 million barrels per day, which keeps domestic production on track to meet the earlier estimate for an increase to 11 million barrels per day in late 2018. If American drillers will not let down, the U.S. will overtake Russia in crude oil production and become the largest global supplier. Such development will likely not please Saudi Arabia and may thwart OPEC efforts to reduce black gold’s stockpiles, increasing worries over another crude oil glut. In such an environment oil bulls could have problems keeping the price not only above $60, but also above the psychological barrier of $50.

Analyzing the current situation in the markets, we also came to the conclusion that the bulls will likely gain an additional enemy in the near future - the strengthening dollar.

As you know from our previous alerts higher values of the U.S. currency often weigh on prices of dollar-denominated commodities. For example, fuel imports for countries using other currencies become more expensive and potentially could even limit demand.

Taking the above ino account, we decided o take a closer look at the correlation between the black gold and the greenback.

Relationship Between Crude Oil and U.S. Dollar

Summing up, taking all the above-mentioned factors into account, we believe that short positions continue to be justified from the risk/reward perspective. As always, we’ll keep you - our subscribers - informed should anything change, or should we see a confirmation/invalidation of the above.

Thank you.

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

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