Trading position (short-term; our opinion): Short positions (with a stop-loss order at $52.52 and the initial downside target at $45.80) are justified from the risk/reward perspective.

On Tuesday, crude wavered between small gains and losses, but finally finished the day 0.63% above Monday’s closure. Despite this improvement, light crude closed yesterday’s session below the lower border of the trend channel. What does it mean for the black gold?

Crude Oil’s Technical Picture

Let’s take a closer look at the charts and find out (charts courtesy of http://stockcharts.com).

Looking at the weekly chart, we see that crude oil remains under the medium-term resistances, which suggests that as long as there is no breakout above them (above the 50-week moving average, the purple declining resistance line based on the previous highs and the previously-broken medium-term green line) another bigger move to the upside is not likely to be seen.

Additionally, the Stochastic Oscillator generated the sell signal, increasing the probability of further deterioration in the coming week(s).

Will the very short-term chart confirm this scenario? Let’s check.

Yesterday, we wrote the following:

(…) we would like to comment the price action that we saw in previous hours (…). Crude oil moved higher and climbed above $48, but did this increase change anything? In our opinion, it didn’t. Why? Because in this area is currently the lower border of the purple rising trend channel, which suggests that today’s move may be a verification of yesterday’s breakdown. Therefore, if the commodity closes today’s session under this resistance line, oil bears will receive another reason to act and we’ll likely see further deterioration.

From today’s point of view, we see that the situation developed in line with the above scenario and the black gold closed the day below the lower border of the purple rising trend channel, verifying Monday’s breakdown.

What does it mean for light crude? As we wrote yesterday, such price action suggests that another move to the downside is just around the corner – especially when we factor in the medium-term picture.

How low could the commodity go in the coming days?

In our opinion, if crude oil declines from current levels, the first downside target will be the recent low, the 50-day moving average and the 50% Fibonacci retracement (around $46.32-$46.60). However, if this support area is broken, we’ll see further deterioration and a test of the late July low of $45.40 and the 61.8% Fibonacci retracement in the following day(s).

Finishing today’s alert please keep in mind that although yesterday’s API report showed a decline in crude oil inventories, gasoline stocks rose by 1.4 million barrels and distillates gained 2.0 million barrels, missing analysts’ expectations. Therefore, if today’s government data confirms these numbers, oil bears will receive another important reason to act (similarly to what we saw a week ago).

Summing up, on Tuesday, crude oil verified the earlier breakdown under the lower border of the purple rising trend channel, which suggests that another downswing is just around the corner – especially when we factor in the medium-term picture of the commodity.

Very short-term outlook: bearish
Short-term outlook: bearish
MT outlook: mixed
LT outlook: mixed

Trading position (short-term; our opinion): Short positions with a stop-loss order at $52.52 and the initial downside target at $45.80 are justified from the risk/reward perspective. We will keep you informed should anything change, or should we see a confirmation/invalidation of the above.

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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