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.
On Thursday, crude oil declined sharply after smaller-than-expected drop in U.S. crude inventories. In this environment, light crude lost 5.64% and closed the day under previous lows and the short-term support zone. Will oil bears push the commodity lower in the coming days?
Although yesterday’s U.S. Energy Information Administration report showed that distillate stockpiles fell by 1.574 million barrels, compared to forecasts for an increase of 0.031 million, crude oil inventories declined by 2.223 million barrels in the week ended July 1, missing analysts' expectations. The report also showed that gasoline inventories dropped by 0.122 million barrels, compared to expectations for a decrease of 0.353 million barrels. Thanks to these disappointing numbers, light crude closed the day under previous lows and the short-term support zone. Will oil bears push the commodity lower in the coming days? Let’s examine the charts below and find out (charts courtesy of http://stockcharts.com).
Quoting our previous Oil Trading Alert:
(…) 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.
From today’s point of view, we see that the situation developed in line with the above scenario and crude oil declined sharply once again. As a result, light crude not only dropped to the Jun low, but oil bears managed to push the commodity below it. With this downswing crude oil also declined under the Apr high, invalidating earlier breakout, which is another negative signal. Thanks to yesterday’s decline, light crude closed the session under the green support zone, which suggests further deterioration in the coming day(s) – especially when we factor in a sell signal generated by the Stochastic Oscillator and the size of volume that accompanied Thursday’s move (which was much bigger compared to what we saw in previous days.
Taking all the above into account, we think that the commodity will extend losses and test the strength of the next green support zone (around $42.50-$43.25) in the coming week.
Summing up, short positions continue to be justified from the risk/reward perspective as crude oil dropped not only under the Jun low, but also below the Apr high and the green support zone on significant volume, which increases the probability of further declines and suggests a test of the strength of the next green support zone (around $42.50-$43.25) in the coming week.
Very short-term outlook: berish
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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