Trading position (short-term; our opinion): Short positions (with a stop-loss order at $56.45 and an initial downside target at $45.81) are justified from the risk/reward perspective.

Although the U.S. Energy Information Administration showed a larger-than-expected increase in crude oil inventories, these bearish numbers were overshadowed by an unexpected draw in U.S. gasoline supplies. In this environment, light crude rebounded sharply and invalidated the earlier breakdowns, but is this event as bullish event as it looks at the first sight?

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

Looking at the weekly chart, we see that although crude oil moved higher, the situation in the medium term hasn’t changed much, because the commodity closed yesterday’s session below the previously-broken long-term red line, which means that an invalidation of the earlier breakdown and its potential negative impact on the price is still in effect.

Additionally, the sell signals generated by the indicators remain in play, supporting oil bears and another attempt to move lower (nevertheless, in our opinion, such price action will be more likely and reliable if the commodity closes this week below this important support/resistance line).

Having said the above let’s take a closer look at the very short-term picture of the commodity.

On the daily chart, we see that although crude oil extended losses and dropped under the 50-day moving average, the lower border of the blue consolidation and the green support line based on the previous lows after the market’s open, the commodity reversed and rebounded sharply in the following hours.

Thanks to this increase light crude invalidated the earlier breakdowns, which is a positive development. Nevertheless, with yesterday’s move to the upside the black gold reached the previously-broken orange support/resistance line, which looks like a verification of the earlier breakdown.

If this is the case, light crude will likely move lower once again in the very near future (even if it re-tests the strength of the orange resistance line once again). This scenario is also reinforced by the current position of the daily indicators as the sell signals continue to support further declines and lower prices.

How low could the commodity to in the coming days? In our opinion, if light crude reverses and drops once again, the first downside target will be around $51.22-$51.72, where yesterday’s low and the lower line of the blue consolidation are. If this support area is broken, the next target for oil bears will be around $50.71-$50.75, where the January lows are.

Summing up, short positions continue to be justified as crude oil remains not only under the previously-broken long-term red line (seen on the weekly chart) and the orange declining resistance line (marked on the daily chart), but also well below the red resistance zone created by the recent highs.

Very short-term outlook: bearish
Short-term outlook: mixed with bearish bias
MT outlook: mixed
LT outlook: mixed

Trading position (short-term; our opinion): Short positions (with a stop-loss order at $56.45 and an 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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