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 Wednesday, light crude moved higher as the EIA weekly report showed a smaller-than-expected increase in crude oil inventories. As a result, the commodity came back above $32, but did this increase change anything in the overall picture?

Yesterday, the U.S. Energy Information Administration reported that crude oil inventories for the week ending on February 19 rose by 3.5 million barrels from the previous week. Although the report showed another increase in inventories, yesterday’s numbers were smaller than the API's estimates of a 7.1 million barrel increase on Tuesday evening. The repot also showed that gasoline inventories dropped by 2.236 million barrels and distillate inventories declined by 1.660 million barrels. Thanks to these positive numbers, crude oil bounced off session lows and climbed above $32. What impact did this increase have on the overall picture of the commodity? Let’s take a look at the charts (charts courtesy of http://stockcharts.com).

As you see on the above charts, although crude oil moved higher yesterday, light crude is trading under two key resistance lines: the 2009 low and the neck line of the head and shoulders formation (which means that the pattern is underway and supports oil bears). Therefore, what we wrote on Friday is up-to-date also today:

(…) These two key resistance lines were strong enough to stop oil bulls in the previous month, triggering a decline to a fresh 2016 low. From today’s point of view, the recent upward move looks like anther verification of the breakdown below them, which suggests that light crude will decline from here in the coming week(s) – similarly to what we saw at the end of January.

Additionally, when we compare the size of volume that accompanied these two moves (on the above weekly chart), we clearly see that last week’s rally materialized on smaller volume than the previous upward move, which suggests that oil bulls may not be as strong as it seems at the first sight.

Moreover, please note that even though crude oil moved higher last week, it didn’t move above the previous high that we saw 3 weeks earlier, which is yet another bearish sign.

Once we know the current situation in crude oil, let’s focus on the crude oil ETN – DWTI. What can we infer from the chart below? Let’s check.

On the above chart, we see that although the ETN declined yesterday, the 61.8% Fibonacci retracement (based on the Oct-Jan rally) and the blue support line based on the previous lows continue to keep declines in check. Additionally, the Stochastic Oscillator is oversold, while the CCI bounced off the level of -100 (generating a buy signal), which increases the probability of a rebound in the coming days. If this is the case, the initial upside target would be around 394.22, where the upper blue line (which serves as the nearest resistance) currently is.

Having said the above, let’s take a look at the United States Oil Fund, LP (USO).

From this perspective, we see that despite yesterday’s increase, the price remains under the key resistance - the upper border of the declining wedge (based on the Jan and Feb highs), which suggests that another attempt to move lower is likely – especially when we factor in the current position of the indicators. As you see, the RSI and CCI reached levels similar to those, which we saw at the end of Jan and also at the beginning of Feb. Additionally, the Stochastic Oscillator is very close to generating a sell signal, which increases the probability of another reversal in the coming day(s). If we see such price action, the initial downside target would be around 7.56, where the lower border of the formation currently is.

Before we summarize today’s Oil Trading Alert, we would like o draw your attention to the crude oil inventories at the Cushing Oil Hub in Oklahoma. Yesterday’s report showed that supplies increased by 333,000 barrels, reaching a fresh record-high and marking the 15th build in the last 16 weeks. A week ago, similar situation fueled concerns that the capacity at the nation's largest storage facility approached its limit, which pushed the commodity lower. Taking into account yesterday’s increase in Oklahoma and the fact that U.S. oil inventories rose to an all-time high of 507.6 million barrels, we think that we’ll see similar price action in the coming days.

Summing up, crude oil moved higher once again, but despite yesterday’s increase, the commodity remains under two key resistance lines: the black horizontal line based on the 2009 low (marked on the monthly chart) and the neck line of the medium-term head and shoulders formation. This suggests that the recent upward move could be just another verification of the breakdown and lower values of the commodity are likely. Therefore, we believe that 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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