Trading position (short-term; our opinion): Short positions (with a stop-loss order at $35.63 and a price target at $25.63) are justified from the risk/reward perspective.

Although crude oil moved higher after the market’s open, unexpected increase in crude oil inventories affected negatively investors’ sentiment and pushed the commodity lower. In this way, light crude verified earlier breakdown once again. Does it mean that the recent rally may be over?

Yesterday, the U.S. Energy Information Administration reported that crude oil inventories for the week ending on February 12 increased by 2.1 million barrels. Additionally, motor gasoline inventories rose by 3.0 million barrels last week, while distillate fuel inventories increased by 1.4 million barrels. On top of that, crude oil supplies at the Cushing Oil Hub in Oklahoma rose by only 36,000. Although this increase was smaller-than-expected, the figure fuelled concerns over the capacity at the nation's largest storage facility as it approached its limit. Thanks to these bearish numbers, crude oil gave us dome gains and closed the day under very important medium-term resistance line. What does it mean for the commodity? Let’s examine charts and find out (charts courtesy of http://stockcharts.com).

Looking at the charts from the long- and medium-term perspective, we see that although crude oil moved sharply higher in recent days, the commodity remains under the 2009 low and the neck line of the head and shoulders formation (which means that the pattern is underway and supports oil bears). These two key resistance lines were strong enough to stop oil bulls in the previous month, triggering a decline to a fresh 2016 low. From today’s point of view, the recent upward move looks like anther verification of the breakdown below them, which suggests that light crude will decline from here in the coming week(s) – similarly to what we saw at the end of Jan. Additionally, when we compare the size of volume that accompanied these two moves (on the weekly chart), we clearly see that this week’s rally materialized on smaller volume than the previous upward move, which suggests that oil bulls may not be as strong as it seems at the first sight. Nevertheless, this negative factor will be more bearish if such a low level of volume remains after today’s weekly closure.

Having said that, let’s take a closer look at the inverse crude oil ETN – DWTI.

Looking at the weekly chart, we see that the ETN declined to the green support zone created by the Aug and Dec highs, which suggests that we may see a rebound from here in the coming week.

Are there any other factors that could support this pro-growth scenario? Let’s examine the daily chart and find out.

From this perspective, we see that the ETN declined to the 61.8% Fibonacci retracement (based on the Oct-Jan rally) and the blue support line based on the previous lows. As you see this support area triggered a rebound yesterday, which suggests that further improvement is just around the corner. If this is the case, the initial upside target would be around 406.23, where the upper blue line (which serves as the nearest resistance) currently is.

Finishing today’s Oil Trading Alert, we decided to analyze the current picture of the United States Oil Fund, LP (USO).

On the daily chart, we see that the recent upward move resulted in an increase to the upper border of the declining wedge (based on the Jan and Feb highs), which suggests that reversal and decline from here is very likely. If we see such price action, the initial downside target would be around 7.60, where the lower border of the formation currently is.

Summing up, although crude oil moved higher, the commodity remains under two key resistance lines: the black horizontal line based on the 2009 low (marked on the monthly chart) and the neck line of the medium-term head and shoulders formation. This suggests that the recent upward move could be just another verification of the breakdown and lower values of the commodity are likely. Therefore, we believe that short positions are justified from the risk/reward perspective.

Very short-term outlook: bearish
Short-term outlook: bearish
MT outlook: bearish
LT outlook: mixed with bearish bias

Trading position (short-term; our opinion): Short positions (with a stop-loss order at $35.63 and the price target at $25.63) are justified from the risk/reward perspective. The analogous levels for USO ETF and DWTI ETN are:

• USO initial target price: $6.67; USO stop-loss: $10.25
• DWTI initial target price: $513.31; DWTI stop-loss: $165.84

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.

Since it is impossible to synchronize target prices and stop-loss levels for all the ETFs and ETNs with the main market that we provide this level for (crude oil), the stop-loss level and target price for popular ETN and ETF (among other: USO, DWTI, UWTI) are provided as supplementary, and not as “final”. This means that if a stop-loss or a target level is reached for any of the “additional instruments” (DWTI for instance), but not for the “main instrument” (crude oil in this case), we will view positions in both crude oil and DWTI as still open and the stop-loss for DWTI would have to be moved lower. On the other hand, if crude oil moves to a stop-loss level but DWTI doesn’t, then we will view both positions (in crude oil and DWTI) as closed. In other words, since it’s not possible to be 100% certain that each related instrument moves to a given level when the underlying instrument does, we can’t provide levels that would be binding. The levels that we do provide are our best estimate of the levels that will correspond to the levels in the underlying assets, but it will be the underlying assets that one will need to focus on regarding the sings pointing to closing a given position or keeping it open. We might adjust the levels in the “additional instruments” without adjusting the levels in the “main instruments”, which will simply mean that we have improved our estimation of these levels, not that we changed our outlook on the markets.

Thank you.

Nadia Simmons
Forex & Oil Trading Strategist
Przemyslaw Radomski, CFA
Founder, Editor-in-chief

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