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.
On Monday, crude oil erased Friday increase as the combination of important resistances encouraged oil bears to act. How low could black gold in the coming week?
Crude Oil’s Technical Picture
Let’s examine the technical picture of crude oil (charts courtesy of http://stockcharts.com).
Looking at the above charts, we see that crude oil moved lower yesterday, which means that what we wrote in our previous Oil Trading Alert remains up-to-date also today:
(…) the commodity reached the upper border of the rising trend channel, but there was no breakout above it, which means that the situation in the broader perspective hasn’t changed much.
Additionally, the size of volume, which accompanied the last week’s move was smaller (compared to what we saw in the previous weeks), which together with the sell signal generated by the weekly Stochastic Oscillator and thee proximity to the next solid resistance zone marked on the monthly chart (created by the 38.2% Fibonacci retracement, the barrier of $60, the 50-month moving average and May 2015 highs) increasing the probability that reversal and lower prices of black gold are just around the corner.
On top of that, the pro-bearish scenario is also reinforced by the current situation in the oil-to-stocks and oil-to-oil stocks ratios.
Crude Oil, General Stock Market and Oil Stocks.
Looking at the above chart, we see that although the oil-to-stocks ratio moved higher in the previous week, it is still trading inside the green rising trend channel. As a reminder, the upper line of the formation triggered a decline at the beginning of the month, which suggests that we may see a similar price action in the coming week – especially when we factor the current position of the weekly indicators (the sell signal generated by the Stochastic Oscillator remains in place and there is a negative correlation between the CCI and the ratio).
When we take a closer look at the oil-to-oil stock ratio, we can also notice several bearish factors.
As you see on the above chart, the ratio climbed to the major resistance zone created by the upper border of the green rising wedge, the 50-month moving average and the 38.2% Fibonacci retracement, which seems to be strong enough to stop further improvement and could encourage oil bears to act in the coming week.
If this is the case, and oil bears show their strength, crude oil will reverse and decline to (at least) the bottom of the previous pullback (around $55) in the following days.
Taking all the above into account, we can summarize today’s alert exactly the same words as yesterday:
Summing up, short positions continue to be justified from the risk/reward perspective as crude oil, the oil-to-stocks and oil-to-oil stocks ratios climbed to very important resistance zones, which will likely encourage oil bears to act in the coming days.
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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