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 Friday, crude oil moved lower once again and broke below the next support zone. Where will the commodity head next?
Let’s examine the charts below to find out what can we infer from them (charts courtesy of http://stockcharts.com).
Quoting our Friday’s alert:
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.
From today’s point of view, we see that the situation developed in line with the above scenario and crude oil moved lower once again. Thanks to the last week’s drop, light crude reached the 50-week average, which could trigger a rebound in the coming week. Nevertheless, we should keep in mind that the sell signals generated by the indicators remain in play, supporting oil bears and further deterioration. Therefore, in our opinion, even if we see such price action, it will be a very temporary move, which will precede another downswing.
Having said the above, let’s check how this decline affected the very short-term picture of crude oil.
In our previous alert, we wrote the following:
(…) 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.
Looking at the daily chart, we see that the situation developed in tune with our Friday’s assumptions and crude oil verified the breakdown below the psychologically important level of $50. As a result, oil bears get another reason to act and pushed light crude not only to Thursday’s low, but also below it, which suggests that another downswing may be just around the corner.
If this is the case, and crude oil extends losses, 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.
Summing up, short (profitable) positions continue to be justified as crude oil verified the breakdown below the barrier of $50 and closed Friday’s session under the 200-day moving average and the 50% Fibonacci retracement. This suggests that even if the commodity moves a bit higher and verifies the breakdown under these levels, further deterioration is more likely than not.
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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