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.

Although crude oil moved sharply higher after the market’s open, the commodity reversed and erased earlier gains in the following hours. As a result, light crude closed the day under the barrier of $30 and important resistance line. What’s next?

Yesterday, Saudi Arabia and Russia (the world's top two producers and exporters) agreed to freeze production at January levels (near record highs) if other big oil nations agree to join. Taking into account the fact that any deal is dependent on the approval of Iran, earlier today, oil ministers from Iraq, Qatar and Venezuela arrived to Tehran to convince Iranian oil minister Bijan Zanganeh to join yesterday’s oil production freeze deal. Thanks to these circumstances, crude oil futures moved higher in today's pre market trading and approached the barrier of $30. What’s next? Let’s examine charts and find out (charts courtesy of http://stockcharts.com).

Looking at the daily chart, we see that crude oil moved sharply after the market’s open and hit an intraday high of $31.53. Despite this improvement, oil bulls didn’t manage to hold gained levels, which resulted in a reversal and a sharp decline. Thanks to yesterday’s downswing, light crude erased all earlier gains and invalidated earlier breakout above the barrier of $30 and the neck line of the head and shoulders formation.

In our opinion, this is a negative signal, which suggests further deterioration (even if we see another test of the green resistance line and the level of $30 after the market’s open). Therefore, what we wrote on Monday is up-to-date also today:

The key thing is that crude oil didn’t invalidate the head and shoulders pattern as the price didn’t close above the neck level of the pattern (marked with green). Consequently, the pattern remains in place and we can expect lower crude oil prices in the coming days. Still, if crude oil attempts to move higher on a very temporary basis (…) it will not surprise us (…)

(…) The Stochastic indicator generated a small buy signal, but let’s keep in mind that previous buy signals from the daily version of this indicator were either followed by significant declines (July and August 2015) or very small rallies (after September 2015). Consequently, we don’t view this buy signal as really meaningful.

Summing up, although crude oil moved higher on an intraday basis, the commodity closed yesterday’s session under the barrier of $30 and the neck line of the head and shoulders formation. Therefore, we believe that as long as this bearish pattern is underway lower values of the commodity are very likely and 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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