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 the U.S. Energy Information Administration showed a bigger-than-expected build in U.S. crude oil inventories, oil investors shrugged off bearish numbers, which pushed the commodity above the Jan high. Breakout or Fakeout?

Yesterday, the U.S. Energy Information Administration reported that crude oil inventories increased by 10.4 million barrels in the week ended February 26, reaching a fresh all-time high. Although the report also showed that gasoline inventories decreased by 1.5 million barrels, distillate stockpiles increased by 2.9 million barrels. On top of that, supplies at Cushing, Oklahoma rose by 1.2 million barrels last week, approaching the nation's largest storage facility full capacity. Despite these bearish numbers, oil investors focused on production, which dropped by 25,000 to 9.077 barrels per day (for the first time this year under 9.1 million bpd). As a result, light crude increased above the Jan high, hitting an intraday high of $35.17. Breakout or Fakeout? Let’s take a look at the charts and look for more clues about future moves (charts courtesy of http://stockcharts.com).

On the daily chart, we see that crude oil extended gains and broke above the red resistance zone (created by the Jan high and the Dec low) yesterday. Despite this increase, Wednesday’s improvement was temporary and light crude gave up some gains, closing the day in the support/resistance zone. What’s next? Although yesterday’s move looks positive, we should keep in mind that not far from current levels is the 38.2% Fibonacci retracement, which in combination with the current position of the CCI and Stochastic Oscillator (they are overbought – similarly to what we saw at the beginning of Oct) could encourage currency bears to act - especially when we factor in negative fundamental numbers released in yesterday’s EIA report.

How did the recent upward move affect the medium-term picture? Let’s examine the weekly chart and find out.

From this perspective, we see that crude oil invalidated earlier breakdown under the neck line of the head and shoulders formation (the black line), which looks like a bullish signal that could trigger further improvement. Nevertheless, we should keep in mind that the week is not over yet and we could see a reversal – similarly to what we saw earlier this year. Additionally, when we take a closer look at the chart, we notice that the commodity is still trading under the blue resistance line based on the Mar 9, 2015 and Aug 17 weekly closing prices. Therefore, in our opinion, as long as crude oil is trading under this line and the 38.2% Fibonacci retracement (marked on the daily chart) another downswing is very likely.

Summing up, although crude oil climbed above the Jan high, the commodity remains under the 38.2% Fibonacci retracement and the medium-term blue resistance line (based on weekly closing prices). Additionally, the current position of the CCI and Stochastic Oscillator suggests that reversal and lower values of the commodity are just around the corner. 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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