Trading position (short-term; our opinion): Short positions (with a stop-loss order at $48.56 and initial downside target at $35.24) are justified from the risk/reward perspective.

Although crude oil opened yesterday’s session well below Friday’s closure, the commodity reversed and rebounded sharply on news from Kuwait. Thanks to this move, light crude invalidated earlier breakdown under the level of $40 and closed the day above the 200-day moving average. What’s next?

Yesterday’s reports showed that Kuwait output declined by around 1.5 million bpd in response to a strike of thousands of workers over the weekend, which supported the price of the commodity and helped to erase most of earlier declines. Thanks to this price action, light crude invalidated earlier breakdown under the level of $40 and closed the day above the 200-day moving average. What’s next? Let’s examine charts and try to answer this question (charts courtesy of http://stockcharts.com).

Based only on yesterday’s price action and closing prices we would write that although crude oil moved sharply higher, the commodity didn’t do anything that would change the short-term outlook. Nevertheless, earlier today, light crude extended gains and climbed to around $43, which could look disturbingly for oil bears.

But did this upward move change anything? In opinion, not really. Why? Firstly, light crude remains under the last week’s high, which means that as long as there won’t be a breakout above it our potential five-wave upward move is still in play. If this is the case, we may think of yesterday's and today's growth as a second wave in potential five-wave downward move. Secondly, sell signals generated by the CCI and Stochastic Oscillator remain in place, supporting another attempt to move lower (similarly to what we saw in mid-March). Thirdly, although crude oil increased earlier today to around $43, we should keep in mind that slightly above this level is also the 50-week moving average, which serves as an additional resistance.

Summing up, although crude oil came back above the barrier of $40 and erased most of recent decline, the commodity remains under the last week’s high and the 50-week moving average, which serves as the nearest resistance zone. Additionally, sell signals generated by the daily indictors support oil bears, suggesting another attempt to move lower in the coming days.

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

Trading position (short-term; our opinion): Short positions (with a stop-loss order at $48.56 and initial downside target at $35.24) are justified from the risk/reward perspective. We will keep you informed should anything change, or should we see a confirmation/invalidation of the above.

As a reminder – “initial target price” means exactly that – an “initial” one, it’s not a price level at which we suggest closing positions. If this becomes the case (like it did in the previous trade) we will refer to these levels as levels of exit orders (exactly as we’ve done previously). Stop-loss levels, however, are naturally not “initial”, but something that, in our opinion, might be entered as an order.

Since it is impossible to synchronize target prices and stop-loss levels for all the ETFs and ETNs with the main market that we provide this level for (crude oil), the stop-loss level and target price for popular ETN and ETF (among other: USO, DWTI, UWTI) are provided as supplementary, and not as “final”. This means that if a stop-loss or a target level is reached for any of the “additional instruments” (DWTI for instance), but not for the “main instrument” (crude oil in this case), we will view positions in both crude oil and DWTI as still open and the stop-loss for DWTI would have to be moved lower. On the other hand, if crude oil moves to a stop-loss level but DWTI doesn’t, then we will view both positions (in crude oil and DWTI) as closed. In other words, since it’s not possible to be 100% certain that each related instrument moves to a given level when the underlying instrument does, we can’t provide levels that would be binding. The levels that we do provide are our best estimate of the levels that will correspond to the levels in the underlying assets, but it will be the underlying assets that one will need to focus on regarding the sings pointing to closing a given position or keeping it open. We might adjust the levels in the “additional instruments” without adjusting the levels in the “main instruments”, which will simply mean that we have improved our estimation of these levels, not that we changed our outlook on the markets.

Thank you.

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

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