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 Wednesday, the black gold oil lost 5.38% after the U.S. Energy Information Administration report showed the ninth straight week of increases in crude oil inventories. As a result, light crude dropped not only below the last week’s low but also closed the day under key support levels. What does it mean for the commodity?
Although, the EIA showed that gasoline inventories dropped by 6.555 million barrels and distillate stockpiles fell by 2.676 million barrels, the report also showed that crude oil inventories rose by 8.209 million barrels. As we mentioned in our previous alert, yesterday’s inventory rise was the ninth straight week of increases, which gave oil bears a very good reason to act. As a result, light crude closed the day under key support levels. What does it mean for the commodity?
Let’s examine the charts below to find out what can we infer from them (charts courtesy of http://stockcharts.com).
Quoting our previous alert:
(…) crude oil futures (….) approached Thursday’s low, which suggests that the commodity will likely follow them after the market’s open. Additionally, if the API report of an inventory rise is confirmed by the U.S. Energy Information Administration report, it would be the ninth straight week of increases, which will give oil bears reasons to act.
In this case, we’ll see a drop to (…) the lower border of the blue consolidation and the lower line of the black rising trend channel (around $51.62-$51.80).
From today’s point of view, we see that the situation developed in line with the above scenario and oil bears pushed the black gold sharply lower. Thanks to yesterday’s decline, light crude not only reached our downside targets, but also closed the day significantly below them and approached the barrier of $50.
With Wednesday’s move the commodity broke not only below the lower border of the blue consolidation, but also under the lower line of the black rising trend channel, which is a bearish signal that suggests further deterioration.
How low could the black gold go in the coming days? Based on yesterday’s price action, we think that the next downside target will be around $48.53-$48.78, where the 50% Fibonacci retracement and the 200-day moving average are. Additionally, in this area the size of the downward move will correspond to the height of the black rising trend channel.
How did this drop affect the medium-term picture? Let’s check.
The first thing that catches the eye on the weekly chart is breakdown under the long-term green support line based on the February and November 2016 lows. This is a bearish signal, which suggest that further deterioration in the coming weeks is very likely – especially, when we factor in the sell signals generated by the weekly indicators.
What could happen if the commodity extends losses bellow this important line? In our opinion, we may see a decline even to around $44, where the 38.2% Fibonacci retracement based on the entire 2017-2017 upward move is. Nevertheless, before we see crude oil at this level, oil bears will have to push light crude below several supports.
Summing up, short positions continue to be justified as crude oil dropped below very important support levels, which suggests further deterioration and a drop to (at least) $48.53-$48.78 in the coming day(s).
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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