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Oil Trading Alert: Crude Oil Bottom Prediction

September 4, 2015, 8:57 AM Nadia Simmons

Trading position (short-term; our opinion): Short positions with a stop-loss order at $54.12 and initial (!) target price at $35.72 are justified from the risk/reward perspective.

The price of crude oil rallied sharply just a few weeks ago, but it gave away almost the entire rally. The question is how low can (and is likely to) crude oil slide before the final bottom is reached. Today’s alert is dedicated to answering this critical question.

Today’s alert includes only one chart (courtesy of http://stockcharts.com), but it’s truly a critical one.

WTIC - the monthly chart

Yes, it seems quite likely that crude oil will slide all the way down to more or less $25 dollars and there are multiple reasons for it:

  1. The breakdown below the key long-term rising support line (marked with blue) was confirmed and verified – this year’s rally didn’t take crude oil back above it – the line proved to be strong resistance. This by itself doesn’t imply a target level at a certain point, but it strongly suggests that crude oil has to fall much lower, before the decline is over.
  2. The symmetry of major declines: the 2008 slide is the only decline that is really similar to the current one, and in order for this similarity to be upheld (history repeats itself to a considerable extent), crude oil would have to move even a bit below $25. On the above chart you can see that in the form of the declining dashed black lines.
  3. The symmetry between the 2014 slide and the (likely) current decline. This year we have definitely seen some kind of consolidation (which might still turn out to be a bottom, but that is unlikely in our view) and the move that follows a consolidation is very often similar to the one that preceded it. If you look at the red dashed declining lines on the above chart you’ll notice that for the previous decline to repeat, crude oil would have to move to about $25.
  4. Speaking of the consolidation, it’s taking the form of a head-and-shoulders pattern and once / if the pattern is completed, we will have a pattern-based target at around $25. The reason is that once price breaks below the “neck level”, it’s likely to decline as much as the size of the “head” in the pattern.
  5. The late-2002 and 2003 bottoms create strong support at those levels.

The amount of signals that points to $25 as the most likely target is uncanny, which makes it quite reliable.

Yes, there also are the 2008 and 2009 lows, but generally not much (if anything) confirms them as a major target, so they might not be able to generate anything more than a short-lived bounce (if anything at all).

We would like to stress that the above is what we believe as most likely based on today’s prices and it can change in the following days or weeks. Of course we’ll keep you – our subscribers – updated.

In light of the above, the bearish medium-term outlook and the fact that crude oil is about $1 higher than when we closed our previous short position, we think re-entering short positions is justified from the risk/reward point of view.

Summing up, crude oil moved higher recently, but the medium-term outlook strongly suggests that lower crude oil prices should be seen in the following weeks and we think that re-entering short positions at this time (with crude oil at $46.68) is justified from the risk/reward point of view.

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

Trading position (short-term; our opinion): Short positions with a stop-loss order at $54.12 (yes, that far as the medium-term outlook is unlikely to change as long as crude oil stays below the declining medium-term resistance line) and initial (!) target price at $35.72 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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