Trading position (short-term; our opinion): No positions are justified from the risk/reward perspective.
On Monday, crude oil lost 3.76% as the combination of a bearish Baker Hughes report and news that Iran has sold more than 13 million barrels of oil weighed on investors’ sentiment. Thanks to these circumstances light crude declined sharply and broke below support levels. What does it mean for the black gold?
On Friday, the Baker Hughes report showed that the number of rigs in the U.S. rose by 4 to 529 in the previous week. It was the tenth straight weekly increase and a level not seen since December 2015, which raised doubts among investors that the OPEC and non-OPEC deal to cut oil production could not reduce a global glut contrary to what had been expected earlier. Thanks to these circumstances light crude declined sharply and broke below support levels. What does it mean for the black gold?
Let’s take a closer look at the charts below to find out (charts courtesy of http://stockcharts.com).
On Thursday, we wrote the following:
(…) Although (…) light crude re-approached the December high, the technical situation continues to suggest that the space for gains seems limited (…):
(…) on the weekly chart (…) the proximity to the red gap, which serves as the nearest resistance. (…) the current position of the indicators (…) they climbed to their overbought zones and are close to generating sell signals. (…)
On the daily chart we also see that light crude remains well below the medium-term black resistance line and the red resistance line based on the previous highs (…). Additionally, the invalidation of a breakout above the 2016 peak and its negative impact on the price is still in effect, supporting oil bears. On top of that, sell signals generated by the CCI and Stochastic Oscillator remain in play, suggesting lower prices in the near future.
Looking at the above charts from today’s point of view, we see that oil bears pushed the black gold lower as we had expected. With yesterday’s sharp drop light crude not only declined below the lower border of the blue rising trend channel, but also slipped under the October intraday high, invalidating the earlier breakout. Nevertheless, there is no invalidation of the breakout in terms of daily closing prices, which suggests that we can see a rebound from here in the coming day(s) –especially when we factor in the fact that in this area is also the previously-broken long-term red support line based on the October 2015 and June 2016 highs, which successfully stopped oil bears in the previous weeks.
When can we expect further deterioration? In our opinion, lower prices of light crude will be more likely and reliable if crude oil drops under the mentioned long-term red support line and the green support zone based on the June and October highs (in terms of daily closing prices). In this case, we’ll consider opening short positions. As always, we will keep you – our subscribers – informed should anything change.
Summing up, the outlook for oil turned to more bearish than bullish, but it still doesn't justify opening short positions as light crude remains above the June and October peaks (in term of daily closing prices) and the long-term red support line.
Very short-term outlook: mixed with bearish bias
Short-term outlook: mixed with bearish bias
MT outlook: mixed
LT outlook: mixed
Trading position (short-term; our opinion): No positions are justified from the risk/reward perspective. However, if crude oil invalidates the breakout above the October peak and drops below the long-term red support line, we’ll consider opening short positions. 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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