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 Friday, crude oil reversed and rebounded, which resulted in a comeback to the previously-broken important support/resistance line. As a result, light crude closed the day slightly above $29. Will we see further improvement in the coming days?

In short, it’s not likely and the key reason for it can be seen on the chart below (charts courtesy of http://stockcharts.com).

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 – just like it did on Friday – it will not surprise us, just like it didn’t surprise us on Friday. In fact, we summarized Friday’s alert in the following way:

(…) although crude oil broke under the support line based on the Aug and Jan lows, the commodity reversed and invalidated this small breakdown, which suggests that we could see a rebound later in the day. Nevertheless, even if we such price action, the head and shoulders formations (marked on the medium- and very short-term charts) are underway, which in combination with the current position of the daily indicators suggests lower values of the commodity in the coming days.

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.

What impact did Friday’s price increase have on the medium-term picture?

Not big, because as you see above, light crude remains under the previously-broken neck line of the head and shoulders formation and the barrier of $30. Consequently, Friday’s daily rally doesn’t change much, if anything.

Summing up, although crude oil moved higher on Friday, the head and shoulders formations (marked on the medium- and very short-term charts) are underway, which suggests lower values of the commodity in the coming days. Therefore, we believe that short positions (which are already profitable as we opened then when crude oil was around $34) 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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