Trading position (short-term; our opinion): Short positions (with a stop-loss order at $54.21 and initial downside target at $42) are justified from the risk/reward perspective.
On Monday, crude oil lost 2.40% as continued worries over global glut of crude and refined products weighed on the oil market. In this environment, light crude dropped under the key short-term support line and closed the day below it. What does it mean for the commodity?
Let’s examine charts below and find out (charts courtesy of http://stockcharts.com).
Quoting our yesterday’s alert:
(…) after many days in the consolidation, oil bears finally pushed the commodity under the lower line of the formation, which resulted in another drop to the lower border of the black declining trend channel. Although light crude may rebound from here (similarly to what we saw in previous weeks), we should keep in mind that crude oil closed Friday’s session below the consolidation, which in combination with sell signal generated by the Stochastic Oscillator suggests further deterioration – especially when we factor in the long- and medium-term picture of the commodity.
If this is the case, and light crude drops under the lower border of the trend channel, we’ll see (at least) a test of the nearest green support zone (around $42.50-$43.25) in the coming days.
Looking at the daily chart, we see that the situation developed in line with the above scenario and crude oil reached our initial downside target, hitting an intraday low of $42.97. Although light crude rebounded slightly in the following hours, this move is barely visible from the very short-term perspective (not to mention the medium-term view), which suggests further deterioration in the coming day(s). This scenario is not only reinforced by the sell signal generated by the Stochastic Oscillator, but also by the fact that crude oil closed yesterday’s session apparently below the lower border of the black declining trend channel.
How low could the commodity go in the coming days? As we mentioned yesterday, the first downside target remains the green support zone (the lower line around $42.50). However, taking into account the breakdown under the lower border of the blue consolidation, we think that crude oil may decline even to around $42, where the size of the move will correspond to the height of the formation. On top of that, in this area is also the 38.2% Fibonacci retracement (based on the entire Feb-Jun rally), which serves as additional (very important) support level that could encourage oil bulls to act.
Finishing today’s alert, we would like you to remind what we wrote about the long- and medium-term perspective yesterday:
From the long-term perspective, we see that the commodity extended losses under the 23.6% Fibonacci retracement, which means that invalidation of earlier breakout above this resistance and its negative consequences are still in effect, supporting oil bears.
On the medium-term chart, we see that sell signals generated by the indicators are still in play, supporting lower prices of the commodity. On top of that, two recent candlesticks created a bearish engulfing pattern, which will serve as an additional resistance in the coming weeks.
Summing up, short positions (which are already profitable) continue to be justified from the risk/reward perspective as crude oil closed Monday’s session under the lower border of the black declining trend channel, which suggests further declines and suggests a test of the strength of the lower line of the green support zone (around $42.50) 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 $54.21 and initial downside target at $42) 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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