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.
On Thursday, crude oil gained 0.51% after the European Central Bank signaled its willingness to launch more stimulus measures. As a result, light crude climbed to its nearest resistance, but then gave up some gains. A sign of weakness?
Yesterday, European Central Bank president Mario Draghi said that the bank is ready to cut interest rates in the euro zone from their current record-low of 0.5% and extend its EUR 60 billion a month bond buying program, as early as its next policy meeting in Frankfurt on Dec. 3. This news fuelled hopes that active economic development will increase crude oil’s consumption and pushed the commodity higher. As a result, light crude climbed to an intraday high of $46.10, but then gave up some gains. What’s next? (charts courtesy of http://stockcharts.com).
Looking at the daily chart we see that the blue support zone triggered a small rebound – similarly to what we saw in Sept. Nevertheess, the size of the move is tiny (compared to earlier declines), which in combnation with the fact that the commodity remains well below the long-term red resistance line suggests that further deterioration is jus around the corner.
Having said that let’s focus on the very short-term changes.
Quoting our previous alert:
(…) light crude approached the blue support area (marked on the weekly chart), which was strong enough to stop oil bears several times in Sept. As you see on the daily chart, this area is also supported by the 50-day moving average, which together suggests that we may see a rebound from here in the coming day(s).
Nevertheless, even if we see such price action, we should keep in mind that yesterday’s drop materialized on a bigger volume than Tuesday’s decline, which confirms oil bears’ strength. Additionally, the Stochastic Oscillator generated a sell signal, which is another negative signal. On top of that, even if crude oil rebounds from here, the space for increases seems limited as the black dashed resistance line is quite close.
On the daily chart, we see that the situation developed in line with the above scenario and 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.
Connecting the dots, all the above suggests that lower values of the commodity are just a matter of time. 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, although crude oil moved little higher, the nearest resistance line stopped further improvement, which in combination with sell signals generated by the indicators and the size of volume that accompanied yesterday’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
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