Trading position (short-term; our opinion): No positions are justified from the risk/reward perspective.
On Tuesday, crude oil lost 2.40% as a stronger greenback and ongoing concerns over a global supply glut weighed on the price. Thanks to these circumstances, light crude reversed and erased over 30% of Monday’s rally. Where the commodity head next?
Yesterday, the Census Bureau showed that U.S. construction spending rose 1.1% in October, beating analysts’ forecasts for a 0.6% gain. This largest increase since May supported the U.S. currency, fueling expectations that the Federal Reserve will hike benchmark borrowing costs next year. Additionally, a softer euro also supported the greenback, pushing the USD Index to a fresh 2014 high and making crude oil more expensive for buyers in other currencies. As a result, the commodity reversed and slipped below $68. Will we see further deterioration? (charts courtesy of http://stockcharts.com).
In our previous Oil Trading Alert, we wrote the following:
(…) we should keep in mind that the commodity reached the 38.2% Fibonacci retracement based on the recent decline (launched on Nov 21), which will likely trigger a pullback later in the day (or even in the coming days).
Looking at the above charts, we see that the situation developed in line with the above-mentioned scenario and crude oil erased over 30% of Monday’s rally. Did this move change anything? Not really, because as long as the commodity is trading in a narrow range between the solid support zone (created by the 61.8% Fibonacci retracement and the Aug and Sep 2009 lows) and the 38.2% Fibonacci retracement, bigger upswing or downswing is not likely to be seen.
Before we summarize today’s alert, please keep in mind that Monday’s upswing was much bigger ($5.82) than the previous ones and materialized on huge volume, which is a positive step toward the trend reversal. Nevertheless, as long as the key resistance is in play, another pullback and a test of the strength of the recent low is likely.
Summing up, although crude oil moved lower as we expected, we think that the situation is still unclear to open any positions. Additionally, as we have pointed out before, as long as the commodity is trading in a narrow range between the support and resistance lines, bigger upswing or downswing is not likely to be seen. Therefore, waiting on the sidelines waiting for the confirmation that the final bottom is in is the best choice at the moment.
Very short-term outlook: mixed with bullish bias
Short-term outlook: mixed
MT outlook: mixed
LT outlook: bullish
Trading position (short-term; our opinion): No positions are justified from the risk/reward perspective at the moment, but we will keep you informed should anything change.
Thank you.
Nadia Simmons
Forex & Oil Trading Strategist
Przemyslaw Radomski, CFA
Founder, Editor-in-chief
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