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 moved higher and climbed to the barrier of $50. Despite this improvement, oil bulls didn’t manage to hold this level, which resulted in a reversal and invalidation of the breakout above the 38.2% Fibonacci retracement. What does it mean for the black gold?
Let’s examine the charts below to find out (charts courtesy of http://stockcharts.com).
On the weekly chart, we see that the overall situation in the medium term hasn’t changed much as crude oil is trading between the previously-broken long-term green resistance line and the 50-week moving average, which means that what we wrote yesterday is up-to-date:
(…) although crude oil climbed above the 50-week moving average, invalidating the earlier breakdown, the sell signals generated by the indicators are still in play, suggesting further deterioration. Additionally, we should keep in mind that the week is not over yet, which means that another downswing and drop below the 50-week moving average is likely.
Having said the above, let’s examine the very short-term picture.
Quoting our yesterday’s alert:
(…) the 61.8% Fibonacci retracement encouraged oil bulls to act, which resulted in a rebound and a comeback above the 200-day moving average. Taking this fact into account and the buy signals generated by the RSI and the Stochastic Oscillator, it seems that crude oil could move higher and test the 38.2% Fibonacci retracement based on the March downward move or even the barrier of $50 in the coming day(s).
From today’s point of view, we see that the situation developed in line with the above scenario and crude oil increased slightly above the barrier of $50, but then reversed and closed the day below this technically important level.
In this way, the commodity invalidated the earlier tiny breakout, which is a bearish development. With yesterday’s downswing light crude also slipped under the previously-broken 38.2% Fibonacci retracement, which is an additional negative sign.
On top of that, when we focus on the size of volume, we clearly see that recent increases materialized on smaller volume than earlier declines, which suggests that oil bears are still stronger than their opponents. What does it mean for the commodity? In our opinion, all the above-mentioned factors suggest that declines are not over yet and another move to the downside is just around the corner.
Therefore, if crude oil extends losses from current levels, we’ll see not only a test of the recent low, but also a drop to the next downside target - the medium-term green support line based on the August and November lows (currently around $46.19).
Summing up, short (profitable) positions continue to be justified as crude oil invalidates the tiny breakout above the barrier of $50 and the 38.2% Fibonacci retracement, which suggests another attempt to move lower.
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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