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 moved slightly lower after the market’s open, the commodity reversed and rebounded in the following hours as investors continued to react to wildfires in Canada. Thanks to these circumstances, light crude bounced off the first support zone and closed the day above the medium-term support line, but did this upswing change anything in the short-term picture of the commodity?

Let’s examine charts and find out (charts courtesy of http://stockcharts.com).

Looking at the medium-term chart, we see that although crude oil bounced off the 50-week moving average (similarly to what we saw in the previous week), the commodity is still trading under the long-term black declining resistance line, which means that earlier invalidation of small breakout above this line and its negative impact on the price is still in effect. Additionally, sell signal generated by the Stochastic Oscillator remains in place, supporting further deterioration in the coming days.

Having said the above, let’s check what we can infer from the daily chart.

Yesterday, we wrote the following:

(…) light crude declined sharply, reaching the medium-term green line based on the Feb and Apr lows. With this move, crude oil also approached the last week’s lows and the first green support zone, which together could trigger a rebound later in the day.

From today’s point of view we see that the situation developed in line with the above scenario and crude oil bounced off the first green support zone. With this upswing light crude came back above the medium-term green support line, invalidating earlier small breakdown. Although this is a positive signal that usually suggests further improvement, we should keep in mind that the red resistance zone and the black resistance line continue together to keep gains in check. Additionally, sell signals generated by the indicators remain in play, suggesting that lower prices of the commodity are just around the corner. When can we expect acceleration of declines? In our opinion, a breakthrough will come when light crude drop below the green line -especially when we see a daily closure under this important line.

Summing up, although crude oil bounced off the first support zone and invalidated earlier small breakdown under the medium-term green support line, the commodity remains under the key resistance zone. Additionally, sell signals are still in play, supporting further deterioration in the coming days.

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 $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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