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.

On Tuesday, crude oil extended gains as falling U.S. and OPEC production continued to support the price. President Vladimir Putin’s comments gave the commodity support as well. Thanks to these circumstances, light crude re-tested the major resistance zone. Will it withstand the buying pressure in the coming days?

Yesterday, crude oil extended gains as falling U.S. and OPEC production continued to support the price. As a reminder, the Baker Hughes report showed that the number of rigs drilling for oil in the U.S. dropped by 13 in the previous week, which was the tenth straight weekly decline, while supply from OPEC declined by 280,000 barrels per day last month. On top of that, President Vladimir Putin confirmed that Russian oil companies have agreed not to increase oil production this year, which pushed light crude above $34 once again. But did this increase change anything in the short-term picture? Let’s take a look at the charts (charts courtesy of http://stockcharts.com).

On the daily chart, we see that crude oil climbed to the red resistance zone (created by the Jan high and the Dec low) once again, but then gave up some gains and closed the day under $34, creating a doji candlestick. As a reminder, such candlestick suggests that the buyers are losing conviction and increases the probability of a reversal – especially when we factor in the resistance area and the position of the indicators. Therefore, we believe that what we wrote yesterday remains up-to-date also today:

(…) light crude rebounded and erased most of the Friday’s drop. Although this is a positive signal, which suggests another test of recent highs, we should keep in mind that yesterday’s upswing materialized on smaller volume than earlier declines. Additionally, the Stochastic Oscillator increased to the levels that we saw in Oct. Back then, the indicator reversed and generated a sell signal, which triggered a long-lived downward move that took the commodity under the barrier of $30. When we take a closer look at the daily chart, we’ll also notice that all sell signals generated by the indicator since Oct resulted in further deterioration in crude oil. Taking this fact and the red resistance zone into account, we think that reversal is just around the corner.

Nevertheless, to have a more complete picture of the commodity, we decided to examine the oil-to-oil stocks ratio. What can we infer from it? Let’s check.

From this perspective, we see that the ratio bounced of the Feb low and increased to the red resistance zone created by the green and red resistance lines and the 38.2% Fibonacci retracement. As you see on the chart, the green resistance line stopped further improvement in Jan and also in Feb. Nevertheless, from today’s point of view, much more important is the red dashed line (based on Oct 6 and Sep 21 opening prices), which successfully stopped oil bulls many times in the previous months. At this point it is also worth noting there was no weekly closure above this line, which suggests that the space for further gains is limited. If this is the case and the ratio declines from here, we’ll see another downward move in crude oil – similarly to the price action that we saw in previous months.

Summing up, yesterday, crude oil climbed above $34 once again, but the resistance zone created by the previous highs and the Dec low continues to keep gains in check. Additionally, the current position of the Stochastic Oscillator and the oil-to-oil stocks ratio 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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