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

On Friday, crude oil gained 2.79% as stronger U.S. jobs data and Baker Hughes’ report supported the price. As a result, light crude extended rally and closed the week above $50 for the first time since the beginning of the year. Will we see further improvement?

On Friday, although the Labor Department showed the U.S. unemployment rate increased to 5.7% from 5.6% in December, the U.S. economy added 257,000 jobs in the previous month beating expectations for an increase of 234,000. Additionally, Friday’s data showed that U.S. average hourly earnings rose 0.5% in January, exceeding expectations for a 0.3% gain. Thanks to these bullish numbers, the price of crude oil moved higher as data fueled optimism over the strength of the local job market.

On top of that, industry research group Baker Hughes reported that the number of rigs drilling for oil in the U.S. fell by another 87 in the previous week to 1,136, which is the lowest since December 2011. At this point, it’s worth noting that the number of oil rigs has declined in 14 of the last 17 weeks, boosting hopes over alleviate a glut in domestic supplies faster than thought. In his environment, light crude extended rally and climbed to an intraday high of $53.16. Will the commodity increase to $60 in the coming weeks? (charts courtesy of http://stockcharts.com).

Looking at the above charts, we see that crude oil moved higher on Friday and closed the day above the 50% Fibonacci retracement level. With this move, the commodity invalidated also the breakdown under the 78.6% Fibonacci retracement. Although these are bullish signals, we should keep in mind that light crude still remains under the resistance zone created by the 76.4% Fibonacci retracement levels (marked on the weekly chart), the 61.8% retracement (based on the Dec-Jan decline and seen on the daily chart) and the Dec lows. Additionally, slightly above these levels is also the previously-broken 50-day moving average (currently at $54.35), which reinforces this zone. On top of that, when we take a closer look at the daily chart, we see that Friday’s move materialized on smaller volume than Thursday’s move, which is not as bullish sign as it might seems on the first glance. Taking all the above into account, we believe, that what we wrote in our previous Oil Trading Alert is up-to-date:

(…) In our opinion, as long as this area is in play, further rally is questionable. Please note that the current position of the CCI and Stochastic Oscillator suggests that another pullback should not surprise us. If this is the case, the initial downside target would be yesterday’s low of $47.36 (…)

Summing up, although crude oil extends gains, invalidating breakouts below Fibonacci retracement levels, the commodity is still trading below the 76.4% retracement level marked on the weekly chart, the 61.8% retracement (based on the Dec-Jan decline and seen on the daily chart) and the Dec lows. In our opinion, as long as this key resistance zone is in play, further rally is questionable. Therefore, we think that opening long positions is too risky at the moment.

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

Trading position (short-term; our opinion): No positions are justified from the risk/reward perspective. Nevertheless, if we see a daily close above the 61.8% Fibonacci retracement based on the Dec-Jan decline, we’ll consider opening long positions. We will keep you informed should anything change.

Thank you.

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

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