Trading position (short-term; our opinion): Short positions (with a stop-loss order at $56.45 and initial downside target at $45.81) are justified from the risk/reward perspective.
On Tuesday, the black gold extended losses after the U.S. Energy Information Administration revised its 2017 U.S. crude oil output and said that crude production would rise to 9.3 million bpd next year. This news renewed fears about the supply glut and pushed light crude under important support levels. Will crude oil test the barrier of $50 in the coming days?
Let’s take a closer look at the charts below to find out (charts courtesy of http://stockcharts.com).
The first thing that catches the eye on the weekly chart is a drop below the long-term red support line. In this way crude oil invalidated earlier breakout, which is a negative development (it will be even more bearish if the commodity closes the week under this important line) which suggests further deterioration in the coming weeks. Additionally, the CCI and Stochastic Oscillator generated sell signals, supporting oil bears and increasing the probability of declines.
Having said the above, let’s take a closer look at the daily chart and find out how this drop affected the very short-term chart.
Yesterday, we wrote the following:
(…) 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.
Looking at the daily chart, we see that the situation developed in line with the above scenario and crude oil extended losses, which justifies opening short positions.
How low could light crude go in the coming days? In our opinion, the first downside target would be the barrier of $50. If it is broken, the next target for oil bears will be around $49 (the 38.2% Fibonacci retracement base on the August-January upward move and the November 22 high), the 200-day moving average (currently at $46.72), the 61.8% Fibonacci retracement and late-November lows around $45.20 or even the green support zone created by the May, September and early November lows (around $42.20-$43). As always, we’ll keep you - our subscribers - informed should anything change.
Summing up, the medium- and short-term situation deteriorated significantly after crude oil dropped under the long-term red support line, invalidating the earlier breakout. Additionally, light crude declined below the green support zone on rising volume, which increases the likehood of bearish implications for the following days (or even weeks) and justifies opening short positions.
Very short-term outlook: bearish
Short-term outlook: bearish
MT outlook: bearish
LT outlook: mixed
Trading position (short-term; our opinion): Short positions (with a stop-loss order at $56.45 and initial downside target at $45.81) 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, Gold & Silver Fund Manager
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