Trading position (short-term; our opinion): Short positions with a stop-loss order at $54.12 and initial (!) target price at $35.72 are justified from the risk/reward perspective.
Although crude oil moved little higher after the market’s open, the commodity reversed and declined as a stronger greenback weighed on the price. In this environment, light crude lost 1.67% and broke below the 50-day moving average, slipping to the key support area. Will it withstand the selling pressure in the coming days?
On Friday, Baker Hughes reported that the U.S. oil rig count for the week ending on Oct. 16 dropped once again, marking the eighth straight week of weekly declines. Despite this positive news, the USD Index extended Thursday’s rally and climbed to its highest level since Aug12, making crude oil less attractive for buyers holding other currencies. Thanks to these circumstances, light crude reversed and declined, breaking below the 50-day moving average and reaching the key support area. Will it withstand the selling pressure in the coming days? Let’s examine charts and find out (charts courtesy of http://stockcharts.com).
Looking at the above chart we see that the commodity closed another week well below the long-term red resistance line, which suggests that further deterioration is jus around the corner – especially if we see a breakdown under the blue support zone and the blue support line in the coming week.
Having said that let’s focus on the very short-term changes.
Quoting our previous alert:
(…) crude oil rebounded, reaching the black dashed line. As you see, this resistance triggered a pullback, which suggests that further deterioration is just around the corner. Additionally, this scenario is reinforced by sell signals generated by the indicators and the fact that the size of volume that accompanied yesterday’s increase was smaller than during recent declines, which suggests oil bulls’ weakness.
Looking at the daily chart, we see that oil bears pushed the commodity lower as we had expected. With this downswing light crude declined below the previously-broken 50-day moving average and reached the key support zone (created by the green support line based on the Sept and Oct lows, the upper border of the blue declining trend channel and the blue support zone).
What’s next? Although the commodity could rebound from here (similarly to what we saw in Sept), the current position of the indicators (sell signals still support oil bears) and the size of volume that accompanied Friday’s increase (much bigger compared to what we saw on Thursday) suggest that lower values of the commodity are just a matter of time.
Therefore what we wrote in Friday’s Oil Trading Alert is up-to-date also today:
When we could see another sizable downward move? We think that acceleration of declines will appear when crude oil breaks under the upper border of the blue declining trend channel. In this case, the initial target for oil bears would be around $41.72, where the lower line of the formation currently is.
Summing up, the nearest resistance line stopped further improvement once again, which in combination with a drop under the 50-day moving average, sell signals generated by the indicators and the size of volume that accompanied Friday’s increase suggests lower prices of the commodity. Therefore, we believe that further deterioration is more likely than not and short positions continue to be justified from the risk/reward point of view.
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 $54.12 and initial (!) target price at $35.72 are justified from the risk/reward perspective. We will keep you – our subscribers – informed should anything change.
Thank you.
Nadia Simmons
Forex & Oil Trading Strategist
Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Gold & Silver Trading Alerts
Forex Trading Alerts
Oil Investment Updates
Oil Trading Alerts
