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.
On Thursday, crude oil extended gains as Wednesday’s unexpected draw in U.S. gasoline supplies continued to support the price of the black gold. As a result, light crude came back above the previously-broken support/resistance line, invalidating the earlier breakdown. Will we see a repeat of what we saw in the previous weeks?
Let’s examine the charts below to find out (charts courtesy of http://stockcharts.com).
On the weekly chart, we see that crude oil moved higher and came back above the previously-broken long-term red line. Although this is a positive signal, we saw such price action in the previous month. Back then, an invalidation of the breakdown didn’t change much, because the proximity to the red gap successfully stopped oil bulls. Taking this fact into account, we believe that as long as there is no breakout above this key resistance another downswing is very likely.
Once we know the situation in the medium term, let’s check how yesterday’s increase affected the very short-term picture of the commodity.
From the daily perspective, we see that crude oil extended gains and invalidated the earlier breakdown under the orange declining resistance line, which together with the medium-term picture suggest further improvement – similarly to what we saw in similar cases in the previous weeks.
How high could crude oil go? In our opinion, the space for increases is limited, because not far from yesterday’s levels is the red resistance line based on the January and February peaks. Additionally, slightly above this line is also the red resistance zone, which successfully stopped oil bulls several times in past weeks. This means that as long as this area holds further rally is not likely to be seen and another reversal is more likely than not.
Summing up, short positions continue to be justified as crude oil remains under the red resistance zone created by the recent highs and the red gap marked on the weekly chart, which together continue to keep gains in check since the beginning of the year.
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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