Trading position (short-term; our opinion): Short positions with a stop-loss order at $65.23 are justified from the risk/reward perspective.
Although crude oil moved sharply lower (weakened by a stronger greenback), the commodity reversed after a drop to the psychologically important barrier of $50. As a result, light crude rebounded and erased almost all earlier losses, climbing to the previously-broken support/resistance zone. What does it mean for the commodity? Verification of the breakdown or the first sign of reversal?
Yesterday, the U.S. Bureau of Economic Analysis showed that the trade deficit increased to $41.87 billion in May, beating analysts’ expectations. This positive report in combination with the uncertainty around the Greece’s future in the euro zone pushed the USD Index to a five-week high of 97.40, making crude oil less attractive for buyers holding other currencies. As a result, light crude slipped to a fresh 3-month low of $50.58. The proximity to this psychologically important support encouraged oil bulls to act and crude oil erased almost all earlier losses. But did this move change anything in the overall picture of the commodity? (charts courtesy of http://stockcharts.com).
Quoting our previous Oil Trading Alert:
(…) oil bears (…) managed to push light crude below the green support zone created by the Feb highs. Taking this bearish signal into account, and combining it with sell signals generated by the daily and weekly indicators, we believe that lower values of the commodity are more likely than not.
(…) With this downswing, light crude confirmed the breakdown below the lower border of the consolidation, which means that we may see a decline to around $50.44, where the size of the downward move will correspond to the height of the formation.
As you see on the above charts, oil bears pushed the commodity lower as we had expected. With this downward move, crude oil almost touched our downside target, approaching the psychologically important barrier of $50 and the 61.8% Fibonacci retracement (marked on the daily chart). This support area encouraged oil bulls to act, which resulted in a sharp rebound that erased almost all earlier losses.
Despite this increase, the commodity closed the day under the previously-broken zone created by the Feb highs (it serves as the nearest resistance at the moment), which suggests that yesterday’s upswing could be nothing more than a verification of earlier breakdown. If this is the case, and light crude declines from here, it would be a bearish signal, which will trigger further deterioration and another test of the $50 (please keep in mind that sell signals generated by the weekly indicators remain in place, supporting further declines) in the coming day(s).
Finishing today’s alert we would like to draw your attention to the fact that yesterday’s upswing is much smaller than the previous upward moves, which we saw at the end of May and later in June (all marked with blue on the daily chart). This means that the short-term downward trend remains in place, suggesting lower values of the commodity. At this point, it is also worth noting what we wrote in our Oil Trading Alert posted on June 29:
(...) this year’s rally is simply a sizable correction of the previous massive decline (...) there was no major breakout and the trend remains down, (...) as crude oil didn’t move above the long-term rising resistance line and the 200-month moving average.
Summing up, in our opinion, short positions in crude oil are justified from the risk/reward perspective as crude oil verified the breakdown under the zone created by the Feb highs. Additionally, yesterday’s upswing is much smaller than the previous upward moves (seen at the end of May and later in June), which confirms that not only the long-term, but also short-term downward trend remain in place, suggesting lower values of the commodity in the coming days.
Very short-term outlook: bearish
Short-term outlook: bearish
MT outlook: bearish
LT outlook: bearish
Trading position (short-term; our opinion): Short positions with a stop-loss order at $65.23 are justified from the risk/reward perspective. We will keep you – our subscribers – informed should anything change.
Thank you.
Nadia Simmons
Forex & Oil Trading Strategist
Przemyslaw Radomski, CFA
Founder, Editor-in-chief
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