Trading position (short-term; our opinion): Short positions (with a stop-loss order at $54.21 and initial downside target at $43.37) are justified from the risk/reward perspective.

Although crude oil moved lower after the Wednesday’s market’s open, the commodity reversed and rebounded in the following hours on hopes that weekly supply reports will show another decline in U.S. crude inventories. As a result, light crude gained 2.20% and came back to the previously-broken 50-day moving average. What’s next?

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

Yesterday, we wrote:

(…) the commodity dropped under the 50-day moving average and closed the day below it, which is a negative signal. Additionally, the Stochastic Oscillator generated a sell signal, supporting lower values of light crude. On top of that, Tuesday’s decline materialized on sizable volume, which confirms oil bears strength and suggests that further deterioration is just around the corner. If this is the case, and crude oil extends declines from here, we’ll see a test of the Jun 27 low of $45.83.

On the daily chart, we see that oil bears pushed light crude lower after the market’s open as we had expected. However, the green support zone in combination with the Jun low encouraged oil bulls to act, which resulted in a rebound. Thanks to this upswing light crude increased to the previously-broken 50-day moving average and closed the day slightly above it. Although this is a positive signal, yesterday’s increase materialized on smaller volume than Tuesday’s decline and sell signal generated by the Stochastic Oscillator (and sell signals generated by the weekly indicators) remains in play, supporting lower prices of crude oil. Therefore, in our opinion, another downswing and a re-test of Jun low are just around the corner.

Finishing today’s alert, we would also like to emphasize that even if oil bulls manage to push the commodity higher from current level, we believe that as long as there won’t be a breakout above the blue and black resistance lines, another bigger move to the upside is not likely to be seen and short positions are justified from the risk/reward perspective.

Summing up, short positions are justified from the risk/reward perspective, because although the green support zone and Jun low triggered a rebound to the 50-day moving average, yesterday’s move materialized on smaller volume and sell signals remain in place, which suggests that further deterioration is just around the corner.

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 $54.21 and initial downside target at $43.37) 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.

Thank you.

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

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