Taking more than its fair share of time, crude oil did in the end respond to the USD weakness with an upswing. And as yesterday's USDX downswing has left a mark on the greenback's short-term outlook, the oil bulls are striving to add to their gains also today. What are their prospects?
Meanwhile, the USD Index breached two important supports yesterday: the declining support line and mid-September low. And that is influencing the short-term outlook - so, what are the scenarios for the upcoming moves exactly?
As you've read in the previous Oil Trading Alerts and Forex Trading Alerts, Nadia Simmons, who is the author of these reports has not been feeling well. This remains to be the case, and as it's been several days since you received crude oil or forex analysis from us, I (PR here) would like to help.
Consequently, I will be writing analyses of both: crude oil and the forex market and I will publish them combined, so that those, who normally enjoy access to only one of these reports, will get something extra. That's not much of a positive surprise for those, who already have access to both Alerts (for instance through the All-Inclusive Package), so if you have access through this package or you subscribed to both products individually, I will provide you with something extra. I will analyze any company of your choice with regard to its individual technical situation, and I will send you this on-demand analysis over e-mail. If this applies to you, please contact us with the name of the company that you're interested in.
On an administrative note, Nadia will be back and Oil Trading Alerts as well as Forex Trading Alerts will take their regular form on Tuesday, Oct 22. Thank you for your patience.
Having said that, let's take a look at the USD Index.
We usually started these analyses with crude oil, but given the current crude-oil-USD link, it seems that it will be useful to reverse this order.
Forex Analysis
As far as the currency market is concerned, Nadia usually covers the individual currency pairs. However, that's not what I specialize in, so instead of the usual format of these analyses, I will maximize their usefulness and likely profitability. This means that instead of focusing on individual currency pairs, I will cover the USD Index, as that's what I've been following on a regular basis for years.
It's also tradable, as there are futures on it (DX symbol) as well as ETFs, for instance the UUP and the UDN.
Yesterday's top news was the initial Brexit deal, which caused some turmoil, in particular on the currency market. The emphasis should go on "initial" as there's really no real deal yet - whether there is one will be determined tomorrow, during Saturday's vote in the UK. And the odds are that this vote will not go in Boris Johnson's favor. As Bloomberg reports:
If he is to win Saturday's vote, Johnson needs to secure the support of Northern Ireland's Democratic Unionist Party, which has categorically opposed the agreement he reached with the European Union on Wednesday. He is also seeking to woo reluctant members of his own side, and persuade opposition Labour politicians to back him, if he is to prevail.
Securing the support of the party that categorically opposed this agreement doesn't seem likely at all. The market moved yesterday and the USD Index fell, but there was no real basis for that. The stagnation regarding Brexit seems to be so severe and so little happened in the previous months that yesterday's no-news news seems like a game changer. But just because a turkey is noticeably different and bigger than a chicken, it doesn't make it an ostrich. The difference between the previous stagnation and yesterday's news is noticeable, but it's not the game-changer it's portrayed to be. The USD Index reacted to the ostrich-like scare, but it seems that the market will soon realize that what we have here is the chicken that just got a few extra feathers.
Let's see what the U.S. currency did exactly.
The USDX just moved below the September and late-August lows, closing below them. This breakdown opens the way to further declines, so the question becomes how far can the USDX slide. It seems that not much. The index has been trading in a specific manner in the previous months and nothing suggests that this short-term correction is going to be anything bigger than the previous ones.
We copied the previous declines (marked with green and blue) to the current situation and it clear that if the USD Index was to match these moves than it could decline some more, but the size of this move is not likely to be huge.
The nearest support levels are provided by the previous lows and the 200-day moving average. The upper target is at about 97 and the lower target is at about 96.3. There's also the rising red support line a bit below 96, but it's highly unlikely that the USD Index would drop as low.
There's also another line that's not visible on the previous chart and it's the blue line based on i.a. the mid-2018 low. It's a bit above 96, so it strengthens the support provided by the mid-July 2019 low.
So, in the more bullish scenario, USDX could rally once bottoming close to 97, and in the less bullish scenario, it could rally once bottoming close to 96.3. In case of the former, the decline would be smaller than the March 2019 decline, and in case of the latter, the decline would be a bit bigger than the May - June 2019 decline. Both scenarios seem possible, but the bottom at 97 is more probable in our view.
The scenario in which the USDX breaks below 96 and continues to fall for weeks is very unlikely in our view, given the resilience that the U.S. currency has been consistently showing in the previous months in light of bearish news like Trump calling for a lower dollar or significantly lower interest rates.
This means that right now, the situation in the USD Index is unclear in the short run, but it doesn't seem that we will have to wait for long before it clarifies. Perhaps we will have to wait just until Monday. The failure to confirm the Brexit deal during the Saturday vote could immediately reverse USD's decline. Or we might have to wait for a few extra days before the support levels are reached, which would then trigger the reversal.
For now, no positions seem justified, but once we get the bullish confirmations (and we are likely to get them soon), we will quite likely open a long position in the USD Index. We might open individual currency pair positions instead as that's what's more likely once Nadia is back (on Tuesday).
Naturally, the long-term trend remains up, and our previous comments on it remain up-to-date:
The USD Index is after a major long-term breakout and this breakout was already verified a few times. The most recent rally is just the very early part of the post-breakout rally. Much higher USD Index values are likely to follow in the upcoming months.
The long-term trend is up as even the dovish U-turn by the Fed, rate cuts, and myriads of calls from President Trump for lower U.S. dollar and much lower (even negative) interest rates, were not able to trigger any serious decline.
What we saw instead was a running correction that's the most bullish kind of corrections. It's the one in which the price continues to rally, only at significantly smaller pace.
Trading position (short-term; our opinion): No positions.
Crude Oil Analysis
Let's start today's crude oil analysis with a quote from yesterday's Alert, as the information regarding the crude-oil-USD link is particularly important today:
In the very recent past - the last several days - the USD Index and crude oil moved in the opposite ways. Thursday's and Friday's upswing in crude oil corresponded to declining USD. And the USD Index seems to be bottoming.
Instead of bottoming right away after we wrote the above, the USD Index moved even lower and reached its next support level. The way the link between crude oil and the USDX behaved, is what made us lower the profit-take level. You see, crude oil continued to take USD's lead, but the strength of crude oil's response was weak. Oil moved higher, but insignificantly so. This link is even more bearish based on what we see today. If a price doesn't bullishly react to what used to be a bullish factor, it's an indication that the price wants to move in the opposite direction.
To be clear - the above is not enough to make the short-term outlook bearish on its own. However, it is enough to make the short-term outlook relatively neutral. And if the outlook is neutral, then (opening) no position, neither long nor short, is justified from the risk to reward point of view.
The question remains whether one should close the position right away or wait for a better exit price. We initially (before today's decline in the USD Index) planned to bet on a very short-term increase in crude oil price. However, today's lack of a big rally is too bearish for us to justify keeping the long position any longer.
The chart below is what we had prepared a few hours before publishing this analysis.
What we focused on was the breakout above the rising resistance line and crude oil's breakout above the declining short-term resistance line and its verification. It reversed at the intersection of two lines, which increased the odds that we had just seen a reversal.
Indeed, crude oil moved higher after the above moment, but based on a big pre-market decline in the USD Index, crude oil was able to rally to only 53.30. This means that it was not able to even get back to its recent high. This is a very bearish sign and one that almost makes us open a short position right away.
No, we are not opening it (we prefer to see how crude oil closes today), but we do think that the profits on the long position should be taken off the table. At the moment of writing these words, crude oil is trading at $52.97, which means that the above provides us with a $1.25 profit since we entered the current long position earlier this month (at $51.72, very close to the bottom).
The next trade will probably be a short position, at least based on the monthly crude oil chart below.
What did crude oil do after we posted the above? It moved higher and it's currently trading at about $54.
But does this mean that taking profits yesterday was a bad idea? After all, they could have been higher if we waited. It may seem surprising, but we don't think so. The rally happened, but the odds of it happening were too low to justify an open position. Just as one can't make all the money in the world, it's not possible to profit on all the price moves. And it's best not to attempt that as the profits on the favorable positions could get eaten by the effects of other trades. We traded the easy part of the upswing and instead of chasing the market to the last penny (that can prove really costly when there's a shift in market odds), we took the decision to wait until the risk to reward ratio becomes favorable once again.
This might take place relatively soon. Once the USD Index bottoms - which might take place before long - the price of crude oil could top and while it's far from being certain that crude oil moves much higher (in fact, it doesn't seem very likely given oil's recent weakness when faced with USD's declines), the chance is too big for us to open a short position right now. We will likely open it sometime next week, though.
Meanwhile, our comments on crude oil's medium-term outlook remain intact:
Crude oil reversed in a profound way in September, which suggests that lower prices are likely in the following months. The sell signal from the monthly Stochastic indicator also remains intact. That's in tune with the same indicator on the daily timeframe. The outlook is simply not as bullish as it used to be in the previous days.
Trading position: No positions.
As always, we will keep you - our subscribers - informed.
Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager
