Trading position (short-term; our opinion): Speculative short positions in crude oil seem to be justified from the risk/reward perspective.

On Thursday, after the market’s open crude oil hit a 2-week low as bearish supply data continued to weigh. However, the commodity reversed as slightly better-than expected U.S. job data supported the price. As a result crude oil reached its major support line. Will it encourage oil investors to push the buy button?

Yesterday, we wrote:

(…) high stockpiles of oil products like gasoline and diesel offset the impact of a drop in crude stocks, signaling that the summer driving season is not as robust as expected.

As we mentioned earlier, this bearish news continued to weigh on the price also after the market’s open, pushing crude oil to its lowest level since May 20. Despite this drop, the commodity reversed on better-than expected U.S. job data as employment growth can indicate stronger demand for petroleum products, especially gasoline, as more commuters drive to work. Yesterday, the Department of Labor reported that the number of individuals filing for initial jobless benefits in the week ending May 31 increased by 8,000 to 312,000, while analysts had expected jobless claims to rise by 6,000 to 310,000 last week.

Will crude oil extend gains in the near future? Let’s check technical picture of crude oil (charts courtesy of http://stockcharts.com).

The medium-term situation hasn’t changed much as crude oil remains below the blue resistance line based on the recent highs (the upper border of the triangle). Therefore, we still believe that the proximity to this line will continue to be supportive for oil bears and we’ll see futher deterioration and a pullback to around the 50-week moving average (currently at $101.08) in the coming week (or weeks).

Once we know the above, let’s check on the very short-term picture.

Quoting our last Oil Trading Alert:

(...) light crude reversed and declined to the 38.2% Fibonacci retracement based on the recent rally once again. (...) if it is broken (which is more likely in our opinion), we will see a re-test of the strength of the black medium-term declining line (currently around $101.83). At this point, it’s worth noting that this area is also supported by the 50-day moving average (and the 50% Fibonacci retracement at $101.62).

Looking at the above chart, we see that oil bears realized the above-mentioned scenario yesterday. As you see on the daily chart, the support zone created by the key support line, the 50% Fibonacci retracement and the 50-day moving average succesfully stopped further deterioration and light crude rebounded. Despite this fact, the size of the upswing is too small to say that the situation in the very short-term improved. If oil bulls do not give up, we may see an increse from here to around Wednesday high of $103.69. However, the fail, crude oil will re-test the strength of the above-mentioned support zone. Please keep in mind that sell signals generated by the CCI and Stochastic Oscillator are still in play, supporting the bearish case.

Summing up, although crude oil rebounded after a drop to the medium-term declining support line, the size of the corrective upswing is too small to say that the situation in the very short-term improved. Therefore, we remain bearish as 3 major technical factors that we mentioned yesterday (sell signals generated by the indicators remain in place, the breakdown below the lower border of the rising trend channel was verified and light crude remains well below the strong resistance zone) still suggest that further deterioration and lower values of crude oil are just around the corner.

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

Trading position (short-term): Short. Stop-loss order at $105.50. We will keep you informed should anything change, or should we see a confirmation/invalidation of the above.

Thank you.

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

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