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 oil lost 5.13% after the EIA showed an unexpected rise in crude oil inventories. Thanks to this sharp decline, light crude dropped under the 61.8% Fibonacci retracement, which opened the way to lower levels. How low could the commodity go in the coming days?
Yesterday, the Energy Information Administration showed that crude oil inventories rose by 3.29 million barrels in the week ended May 26, missing expectations of draw of around 3.5m barrels. On top of that, the report also showed that gasoline inventories increased by 3.3 million barrels and distillate inventories rose by 4.4 million barrels. These bearish numbers affected very negatively the price of crude oil, which resulted in a sharp decline and a daily closure below $46. How low could the commodity go in the coming days?
Crude Oil’s Technical Picture
Let’s take a closer look at the charts and find out (charts courtesy of http://stockcharts.com).
Yesterday, we wrote the following:
(…) light crude extended gains (…) and closed the day above the 50% retracement. But did this increase change anything in the short-term picture of the commodity? In our opinion, it didn’t, because despite yesterday’s move, crude oil is still trading under the previously-broken long-term green line (which serves as the nearest resistance) and well below the 50- and 200-day moving averages. This suggests that as long as there is no invalidation of the breakdown under the green resistance line all upswings could be nothing more than a verification of the earlier breakdown. Therefore, another attempt to move lower and (at least) a re-test of the recent lows is very likely.
From today’s point of view, we see that the situation developed in line with the above scenario and crude oil extended losses yesterday. As you see on the daily chart, oil bears pushed light crude not only to recent lows, but also well below the 61.8% Fibonacci retracement, making our short positions more profitable.
What's next for Crude Oil?
Taking into account the size of yesterday’s candlestick, the size of volume on which it materialized and the sell signals generated by the daily and weekly indicators, we believe that the downside target from our alert posted on May 30 will be in play in the very near future:
(…) If this is the case and crude oil moves lower, the first downside target will be the long-term green support line based on the August and November lows (…). If crude oil drops under this important support, the next target for oil bears will be (…) the previously-broken lower border of the red declining trend channel (…)
Summing up, short (profitable) positions continue to be justified from the risk/reward perspective as crude oil moved sharply lower, breaking below the 61.8% Fibonacci retracement and closing the day below it. Additionally, yesterday’s move materialized on significant volume, confirming oil bears’ strength and increasing the probability of further declines 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
Gold & Silver Trading Alerts
Forex Trading Alerts
Oil Investment Updates
Oil Trading Alerts
