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 losses and not only dropped under the barrier of $50, but also closed the day below it for the first time since December 7. Does it mean that the way to lower levels is open?
Let’s examine the charts below to find out what can we infer from them (charts courtesy of http://stockcharts.com).
Yesterday, we wrote the following:
(…) 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.
As you see, the situation developed in line with this scenario and crude oil reached our initial downside target. What’s next? Taking into account the fact that light crude rebounded before the market’s closure, it seems to us that the commodity could move a bit higher and verify the breakdown under the barrier of $50 in the coming day(s). If this is the case, it would be a negative event, which will likely translate into another attempt to move lower and a test of yesterday’s low of $48.59.
What if this area is broken? In our opinion, the next downside target will be around $47 (the 61.8% Fibonacci retracement) or even at $45.80, where the medium-term green support line based on the August and November lows currently is.
Having said the above, let’s check how this drop affected the medium-term picture.
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 earlier mentioned supports.
To have a more complete picture of crude oil let’s zoom out our picture and examine the long-term chart of the commodity.
From this perspective, we see that the CCI and the Stochastic Oscillator generated the sell signals, which is a bearish development. Similar situation we saw a long time ago – in October 2013 (in the case of the CCI) and June 2011 (in the case of the Stochastic Oscillator). In both cases, the sell signals preceded bigger declines, which increases the probability that we’ll see similar price action in the coming weeks.
Summing up, short (profitable) positions continue to be justified as crude oil closed yesterday’s session under the barrier of $50 and remains under previously-broken very important support levels. This suggests that even if the commodity increase to $50, it will likely be nothing more than a verification if the breakdown.
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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