Trading position (short-term; our opinion): No positions are justified from the risk/reward perspective.
On Tuesday, crude oil extended gains as bullish note from Goldman Sachs, production disruptions in Nigeria and increased political instability in Venezuela continued to weigh on investors’ sentiment. As a result, light crude hit a fresh 2016 high and approached the barrier of $50. The move was something unlikely based on the resistance levels that were in play and in consequence, the move higher showed unlikely – yet significant – strength in crude oil. Given the previously bearish outlook and such a positive signal this week, the current outlook can be best described by the word “unclear”. Once the dust settles and a clearer outlook emerges, we will let you know, since this is not the case right now, we will provide 2 scenarios that could happen based on whether the bullish or bearish forces prevail.
We are not providing charts today as the differences in data in case of data providers are too significant (the futures prices are too different from the reported spot prices for us to find the latter believable) which decreases the level of clarity even more.
Still, we can say that on Tuesday, crude oil climbed above the Nov high, which suggests that we may see a test of the next psychologically important barrier of $50 or the Oct high of $50.92. If this area is broken, oil bulls may push the commodity even to around $60, where the 38.2% Fibonacci retracement (based on the entire 2011-2016 downward move), May and Jun 2015 highs are.
On the other hand, if the commodity reverses and declines from current levels (and we see the invalidation of recent breakouts above the resistance levels), the first downside target would be around $42.50-$43.25, where the support area created by the Apr 26 and May 10 lows is. If it is broken, oil bears will likely push the commodity to around $38.86-$40, where the next psychologically important barrier and mid-Apr low (the bottom of the previous bigger correction) are. If this area doesn’t stop declines, we may see correction to around $34.82-35.24, where the next support zone (created by the Jan high and Apr low) is.
Summing up, the outlook became unclear based on the most recent upswing in crude oil as the resistance levels that were likely to stop it – didn’t. If the breakouts are invalidated, a bigger decline is likely to follow. If they are not invalidated and crude oil manages to break out above the $50 level, we may see a rally to even $60. Either way, it seems that the next trading opportunity is close. As always, we’ll keep you updated.
Very short-term outlook: mixed
Short-term outlook: mixed
MT outlook: mixed
LT outlook: mixed
Trading position (short-term; our opinion): No positions 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.
We will keep you – our subscribers – informed should anything change.
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, Gold & Silver Fund Manager
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