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.
On Wednesday, crude oil lost 4.21% as bigger-than-expected build in gasoline inventories overshadowed anther drop in crude oil stockpiles. As a result, light crude slipped under the 50-day moving average once again, approaching the key support zone. What’s next?
Yesterday, the U.S. Energy Information Administration reported that U.S. crude oil inventories decreased by 1.9 million barrels for the week ending Sept. 18, extending a 2.1 million barrel drop from a week earlier. Additionally, distillate fuel inventories decreased by 2.1 million barrels. Despite these bullish numbers, the report also showed that gasoline inventories increased by almost 1.4 million barrels last week, fuelling worries that such build after the end of summer driving season could translate into high product stocks during autumn months. In these circumstances, light crude declined sharply under the 50-day moving average and approached its key support zone. North or south from here? (charts courtesy of http://stockcharts.com).
Quoting our Tuesday’s commentary:
(…) although crude oil rebounded and came back above the previously-broken 50-day moving average, the commodity remains under the 38.2% Fibonacci retracement, which serves as solid resistance (…) Additionally, the bearish evening star candlestick formation (marked with the red ellipse) is still in play, reinforcing this resistance area.
(…) the size of the volume that accompanied yesterday’s increase wasn’t huge (compared to what we saw at the turn of Aug and Sept), which raises doubts about oil bulls’ strength.
Looking at the daily chart, we see that the 38.2% Fibonacci retracement in combination with evening star candlestick formation and sell signals generated by the indicators encouraged oil bears to act, which resulted in a drop under the 50-day moving average. In this way, light crude invalidated earlier breakout, which is a negative signal that suggests further deterioration – especially when we factor in the fact that yesterday’s drop materialized on bigger volume than Monday’s increase.
Nevertheless, in our opinion, an acceleration of declines will be more likely and reliable if we see a breakdown under the blue support zone and the blue support line marked on the weekly chart. Until this time another short-lived rebound can’t be ruled out.
Summing up, crude oil declined below the 50-day moving average, which in combination with the size of volume that accompanied yesterday’s drop and sell signals generated by the indicators suggests further deterioration. This means that the outlook for crude oil remains bearish and we believe that short positions (which are already profitable as we entered them when crude oil was at about $46.68) continue to be justified from the risk/reward point of view.
Very short-term outlook: bearish
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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