Trading position (short-term; our opinion): No positions are justified from the risk/reward perspective.

On Friday, crude oil reversed and declined as a stronger U.S. dollar and a disappointing Baker Hughes report (it showed that the number of rigs drilling for oil in the U.S. increased by 7 to 414) affected negatively investors’ sentiment. As a result, light crude lost 3.65% and closed the day under the previously-broken resistance line. Is it enough to encourage oil bears to act in the coming week?

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

Quoting our Friday’s alert:

(…) we should keep in mind that light crude also approached the first resistance zone based on the Aug 23 and Aug 26 highs (in terms of intraday highs and daily closings), which may encourage oil bears to act and result in a test of the strength of the black dashed line based on the previous highs (which serves now as the nearest support) in the coming day(s).

Looking at the daily chart, we see that the red resistance zone encouraged oil bears to act as we had expected. With Friday’s decline the commodity not only slipped to the black dashed line based on the previous highs, but also closed the day below it, invalidating earlier breakout. As you know from our previous alerts such situation is usually bearish, which suggests that lower values of light crude and (at least) a test of the 50-day moving average and the upper border of the black declining trend channel are just around the corner. If this area is broken, we’ll likely see a drop to the Sep low of $43 and a re-test of the green support zone. Nevertheless, as long as the buy signal generated by the Stochastic Oscillator remains in place another test of the red resistance zone can’t be ruled out. At this point it is worth noting that this area is also reinforced by the 23.6% Fibonacci retracement and the red resistance zone seen on the monthly chart below.

Therefore, in our opinion, another sizable move will be likely only if we see a breakout above this key resistance. Until this time short-lived moves in both directions (between the support and resistance zones) are very likely, which means that waiting at the sidelines for another profitable opportunity is justified from the risk/reward perspective.

Summing up, crude oil reversed and invalidated earlier breakout above the short-term resistance line, which suggests that as long as the commodity remains below it another attempt to move lower is very likely – especially when we factor in the proximity to the resistance zone seen on the long-term chart.

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 – our subscribers – informed should anything change.

Thank you.

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

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