Trading position (short-term; our opinion): No positions are justified from the risk/reward perspective.

After a strong Monday blow from the bears, oil bulls recovered during Thursday's session and wiped out the last drop, taking black gold to levels that we could observe at the end of last week. Is this just a one-day strong upheaval or the first omen of upcoming changes in the oil market?

Let’s analyze the charts below (charts courtesy of http://stockcharts.com).

Quoting our last Oil Trading Alert:

(…) the buyers do not have any allies at the moment of writing this alert. Very carefully analyzing the daily chart, we can see only one positive – a bullish divergence between the commodity and the daily RSI and Stochastic Oscillator, but it is definitely too little to believe in their strength and a potential reversal.

Therefore, we think that the most sensible investment solution is to observe their behavior during today's session. If they manage to maintain the above-mentioned green support zone, the chance to rebound and strengthen the price of black gold will increase slightly.

Unfortunately, if they fail once again and let the bear break below this area, we will probably see the continuation of the Wednesday scenario:

(…) Nevertheless, if oil bulls do not stop them there, the way to June 2017 lows (around $42.05-$43.16) will be open.

Looking at the above charts, we see that the situation developed in tune with the above scenario and the price of black gold dived to our downside target during Monday's session.

Despite this deterioration, the support area created by the June 2017 lows withstood the selling pressure and managed to encourage oil bulls to act, which translated into a sharp upswing on Thursday.

Thanks to this increase, the price of black gold came back above the previously-broken 61.8% Fibonacci retracement (marked on the monthly chart), the green support zone (seen on the weekly chart) and the lower border of the blue declining trend channel (marked on the daily chart below), invalidating the earlier breakdowns.

Although this is a bullish development, we should keep in mind three important facts:

First, yesterday’s upswing approached crude oil to the previously-broken long-term green line, which serves as the nearest resistance at the moment. Nevertheless, there was no comeback above it, which suggests that yesterday’s move could be nothing more than just a verification of the earlier breakdown.

Second, thanks to Thursday’s increase light crude climbed to the 38.2% Fibonacci retracement (based on the mid-November – late-December downward move) and then pulled back, which means that oil bears are quite active in this area.

Third, yesterday’s move materialized on quite big, but not huge volume (compared to what we saw earlier this month), which shows that fewer buyers were involved in yesterday's strong growth in black gold.

What does it mean for crude oil?

In our opinion, a verification of oil bulls’ strength. In other words, if the buyers manage to keep the price of the commodity above all levels mentioned above (the 61.8% Fibonacci retracement, the green zone, the lower border of the blue declining trend channel), during today’s and tomorrow's session the probability of a bigger correction will increase significantly - especially if the bulls manage to close the week above the long-term green rising line marked on the weekly chart.

However, if we see a deepening of yesterday's pullback or, worse, a drop below the blue declining trend channel, the road to Monday's low will be open.

Which scenario is more likely at the moment of writing these words?

Thanks to yesterday’s price action oil bulls have gained several allies who will support them in further battle for higher levels (the above-mentioned invalidations of the earlier breakdowns and buy signals generated by the daily RSI and the Stochastic Oscillator).

However, as we already mentioned, until we see the level of the weekly closure, we will remain quite cautious and instead of praising bull's strength and determination, we will focus on the pronunciation of the next daily candles. We will keep you informed should anything change, or should we see a confirmation/invalidation of the above.

Trading position (short-term; our opinion): No positions are justified from the risk/reward perspective.

Thank you.

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

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