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

On Wednesday, crude oil lost 1.04% on expectations for a bearish supply report from the EIA as imports rebounded from a 17-year low. Because of these circumstances, light crude closed the day below its important support. Is it enough to trigger another sizable downswing?

In our Oil Trading Alert posted on May 22, we wrote the following:

(…) the U.S. Energy Information Administration showed in its weekly report that U.S. crude oil stockpiles dropped by 7.2 million barrels in the week ending May 16, far surpassing expectations for a 750,000 barrels build. At this point, it’s worth noting that this was the biggest weekly decline in more than four months. This drop was largely attributed to a slide in imports of crude to a 17-year low, but it’s hard to draw bigger implications about price direction from a single week's data. Despite this larger-than-expected drop, total U.S. crude oil inventories remain near record highs and stood at 391.3 million barrels as of last week.

Taking all the above into account, oil investors are waiting to see whether an expected rebound in imports last week was large enough to cause overall inventories to rise. Nevertheless, expectations for a bearish supply report pushed crude oil to its lowest level since May 21. Will the commodity drop much further from here? Let’s look for answer on the charts (charts courtesy of http://stockcharts.com).

From the weekly perspective, we see that the situation has deteriorated as crude oil reversed and declined from the blue resistance line based on the recent highs (the upper border of the triangle). Therefore, what we wrote yesterday is up-to-date:

(…) If this line holds, we will likely see a pullback and the nearest support will be the 50-week moving average (currently at $100.80) (…) the last week’s increase materialized on relative small volume, which questions the strength of oil bulls. On top of that, the RSI approached the level of 60. We saw similar reading in April and also earlier in March. Back then, such readings preceded declines. Therefore, if history repeats itself once again, we may see a correction in the coming week (or weeks).

Having said that, let’s focus on the very short-term picture.

Quoting our last Oil Trading Alert:

(…) the commodity remains below the resistance zone created by the blue and black resistance lines and also the April high. Therefore, we believe that (…) this combination will be strong enough to stop further improvement and trigger a pullback in the coming days. Additionally, we are convinced that if crude oil drops below the lower border of the rising trend channel (currently around ($103.70), a correction will accelerate and the downside target for oil bears will be around $102.30, where the black medium-term declining support line and the 38.2% Fibonacci retracement based on the entire May rally are.

As you see on the daily chart, crude oil dropped below the lower border of the rising trend channel (the black dashed line), which triggered further deterioration. Taking into account the fact that yesterday’s downswing materialized on large volume (compared to the recent days) and combining it with sell signals generated by the CCI and Stochastic Oscillator, we think that oil bears will realize the above-mentioned scenario in the nearest future.

Summing up, the most important event of Wednesday’s session was a breakdown below the lower border of the rising trend channel, which materialized on large volume, confirming the strength of oil bears. This is a strong negative signal, which together with sell signals generated by the indicators provide us with bearish implications and suggests that we’ll see the commodity at least around $102.30 in the coming days.

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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