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 lost 0.31% as ongoing worries over a supply glut in global market drove down the price of the commodity. As a result, light crude moved away from its nearest resistance and closed the day under the Oct low once again. Does it mean that another downward move is just around the corner?
Although the USD Index gave up some gains (as investors decided to take profits from the greenback’s rally), making crude oil more attractive for buyers holding other currencies, the commodity didn’t response positively to this drop and lost 0.31% as the bearish EIA report continued to weigh. As a reminder, crude oil supplies rose by 252,000 barrels last week, disappointing market players. Additionally, inventories at Cushing, Oklahoma, increased by 1.5 million barrels, well above forecasts for a build of 0.8 million barrels. In these circumstances, light crude moved away from its nearest resistance and closed the day under the Oct low once again. Does it mean that another downward move is just around the corner? Let’s examine charts and find out (charts courtesy of http://stockcharts.com).
The situation in the medium term hasn’t changed much as crude oil is still trading under the previously-broken blue zone (reinforced by the blue line), which serves as the nearest important resistance. Additionally, sell signal generated by the Stochastic Oscillator remains in place, supporting oil bears.
Having said that, let’s take a closer look at the short-term changes.
From today’s point of view, we see that the black resistance line encouraged oil bears to act once again, which resulted in another pullback. Taking this fact into account, we believe that what we wrote on Tuesday is still up-to-date:
(…) the commodity climbed to the black resistance line, which could be the neck line of a potential head and shoulders formation. If this is the case and crude oil declines from here, we’ll see a drop below $40 in the coming days. At this point, it is worth noting that if we see such price action, the current decline will likely accelerate, which will likely translate to a test of the Aug lows.
Nevertheless, taking into account the above-mentioned bearish pattern, we may see a decline even to around $35.50, where the size of the downward move will correspond to the height of the formation.
(…) the daily Stochastic Oscillator generated a buy signal, which may result in another test of the black resistance line in the coming day.
Summing up, the first resistance line continues to keep gains in check, which increases the probability that the potential head and shoulders formation (marked on the daily chart) is underway. If this is the case, we’ll see further deterioration in the coming weeks (even if crude oil moves higher and re-tests the black resistance line in the coming days). Therefore, we believe that short positions (which are already profitable as we opened them when crude oil was trading around $46.69) 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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