Trading position (short-term; our opinion): No positions.

Although crude oil hit a fresh multi-month low, slipping below $80 per barrel, the commodity rebounded sharply, supported by solid U.S. data. As a result, light crude gained 2.45% and invalidated a breakdown below the long-term support/resistance. Is this the first positive signal suggesting a trend reversal?

Yesterday, crude oil extended losses and hit a fresh low of $79.78 on ongoing speculations that the OPEC will not cut output to support the market. Despite this drop, the commodity rebounded sharply after solid U.S. data. The U.S. Department of Labor showed that the number of jobless claims in the week ending October 11 decreased by 23,000 to a 14-year low, while analysts had expected a 3,000 increase. Additionally, a separate report showed that U.S. industrial production climbed 1.0% last month, beating expectations for a 0.4% rise.

Although these bullish numbers pushed the commodity to an intraday high of $84.83, light crude gave up some gains after the U.S. Energy Information Administration reported that U.S. crude oil inventories increased by 8.9 million barrels in the week ending October 10, exceeding expectations for a rise of 2.8 million barrels. What’s interesting, market reaction was muted after the data release, mostly because such increase was telegraphed in data released late Tuesday by the American Petroleum Institute industry group, which projected a 10.2M-barrel increase. How did these fundamental factors affect the technical picture of the commodity? Lest’s check (charts courtesy of http://stockcharts.com.)

Quoting our yesterday’s Oil Trading Alert:

(…) crude oil hit a multi-year low of $80 (…) if this support line encourages oil bulls to act, we could see a bigger corrective upswing from here. In this case, initial upside target would be around $84, where the previously-broken lower long-term grey line is.

Although crude oil extended losses after the market’s open, the commodity rebounded sharply in the following hours, invalidating not only a breakdown below the support level of $80, but also climbing above the long-term blue support/resistance line. Additionally, yesterday’s move brought a bullish engulfing pattern (seen on the daily chart), which is a very positive signal – especially when we take into account the place where it appeared.

Speaking of the short-term changes… as you see on the daily chart, for the first time in three months, the current upswing is bigger than the move that we saw in mid-Jul. This suggests that oil bulls are getting stronger and a trend reversal is more possible than earlier (when upswings were smaller). Nevertheless, we should keep in mind that the commodity is still trading under the previously-broken lower border of the declining trend channel and two other long-term resistance lines, which could trigger a pullback from here in the coming day (or days).

Summing up, the most important highlight of yesterday’s trading day was an invalidation of the breakdown below the support level of $80 and the long-term blue support/resistance line. Taking this bullish signal into account, and combining it with the short-term picture, it seems that a trend reversal is just around the corner. Nevertheless, as long as there are no signs that the declines could be over, we think that staying on the sidelines and waiting for the confirmation that the final bottom is in is the best choice at the moment.

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

Trading position (short-term): No positions.

Thank you.

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

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