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 Tuesday, crude oil lost 1.37%, which resulted in a comeback under the 200-day moving average. Will this event trigger further deterioration in the coming days?
Let’s examine the charts below to find out (charts courtesy of http://stockcharts.com).
On the weekly chart, we see that although crude oil moved a bit higher in the previous week, oil bears didn’t give up and pushed the commodity lower in recent days. As a result, light crude came back under the 50-week moving average, which together with the sell signals generated by the indicators support further deterioration.
Having said the above, let’s examine the very short-term picture.
On Friday, we wrote the following:
(…) 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.
(…) 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.
Looking at the daily chart, we see that the situation developed in tune with the above scenario and crude oil moved lower in recent days. Thanks to this decrease, light crude slipped and closed yesterday’s session under the previously-broken 200-day moving average, which is a bearish sign.
Additionally, the Stochastic Oscillator re-generated the sell signal, giving oil bears another reason to act. On top of that, when we take a look at the size of volume, we see that this week’s drops materialized on higher volume than last week’s increases, which confirms that oil bears are still strong and suggests lower prices of light crude.
Therefore, if the black gold 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 $46.30).
Summing up, short (profitable) positions continue to be justified as crude oil invalidates the breakout above the 200-day and 50-week moving averages on higher volume, 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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