Trading position (short-term; our opinion): Short positions (with a stop-loss order at $54.15 and the initial downside target at $45.55) are justified from the risk/reward perspective.

On Wednesday, the black gold extended losses after news that Libya's oil production has risen, climbing above a three-year high. In this environment, light crude lost 2.70% and closed the day below the long-term support line. What does it mean for the commodity?

Crude Oil’s Technical Picture

Let’s take a closer look at the charts and find out what are they telling about future moves (charts courtesy of http://stockcharts.com).

Quoting our previous alert:

(…) light crude (…) erased earlier gains (…), closing the day below $50.

In this way, the commodity invalidated the earlier tiny breakout, which pushed the black gold lower earlier today. How low could light crude go in the coming days? We believe that (…) the first downside target will be the long-term green support line based on the August and November lows (currently around $48.53) (…)

From today’s point of view, we see that the situation developed in line with the above scenario as crude oil not only slipped to the long-term green support line based on the August and November lows, but also closed the day below it, invalidating the earlier breakout. Thanks to yesterday’s decline the black gold also declined under the 50- and 200-day moving averages, which is an additional bearish development.

On top of that, the sell signals generated by the CCI and the Stochastic Oscillator remain in play, supporting oil bears and lower prices of the black gold. Nevertheless, we should keep in mind that yesterday’s decline took light crude to the 50% Fibonacci retracement, which could trigger a small rebound (to the long-term green support line based on the August and November lows) later in the day.

If we see such price action, it will be another negative event, which will suggest a verification of the earlier breakdown. In this case, our next downside target from Tuesday’s alert will be in play:

(…) the first downside target will be the long-term green support line based on the August and November lows (currently around $48.53). If crude oil drops under this important support, the next target for oil bears will be around $45.55, where the previously-broken lower border of the red declining trend channel is.

And speaking about negative events… please take a look at the long-term chart below.

Monthly Closure and Its Implications

Looking at the monthly chart, we see that crude oil closed May under the previously-broken lower border of the rising wedge, which doesn’t bode well for oil bulls – especially when we factor in the sell signals generated by the indicators.

At this point, it is worth noting that the long-term sell signals together with the breakdown under the blue support line (the lower border of the blue triangle) preceded huge declines in 2014, which increases the probability of further deterioration in the coming weeks – even if we see a short-term (and short-lived) rebounds.

Summing up, short (already profitable) positions are justified from the risk/reward perspective as crude oil extended losses and closed the day (and the month) under the long-term green support line based on the August and November lows and the previously-broken lower border of the rising wedge marked on the monthly chart. Additionally, light crude invalidated the earlier breakout above two important moving averages, which together with the sell signals generated by the indicators suggest lower prices of the black gold in the coming days.

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 $54.15 and the initial downside target at $45.55) are justified from the risk/reward perspective. We will keep you – our subscribers – informed should anything change.

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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