Trading position (short-term; our opinion): Short positions (with a stop-loss order at $56.45 and an initial downside target at $45.81) are justified from the risk/reward perspective.
On Monday, crude oil lost 0.50% and almost touched last week’s low. Will we see a post double bottom rally or further declines?
Let’s examine the charts below to find out (charts courtesy of http://stockcharts.com).
From the medium-term perspective, we see that crude oil is trading in a blue consolidation (under the barrier of $50 and the 50-week moving average and slightly above the green dashed line based on the August and mid-November lows), which suggests that only a breakdown under the lower line of the formation will trigger another move to the downside.
Will we see such price action in the coming days? Let’s examine the daily chart and look for more clues about future moves.
Quoting our yesterday’s alert:
(…) although crude oil moved a bit higher on Friday, the commodity is still trading under the 38.2% Fibonacci retracement, below the previously-broken 200-day moving average and the sell signal generated by the daily Stochastic Oscillator remains in play, supporting oil bears and suggesting lower prices of the black gold in the coming week.
This scenario is also reinforced by the size of volume, which accompanied Friday’s increase – it was visibly smaller than earlier - during declines, which confirms oil bears the direction of the move. Taking all the above into account, we believe that if light crude drops from current levels, we’ll see (…) a test of the recent lows (…)
Looking at the daily chart, we see that the situation developed in line with the above scenario and crude oil re-tested the strength of the recent lows. In this area there two important support levels – the 50% Fibonacci retracement based on the entire August - January upward move and the 61.8% retracement based on the mid – November – January rally, which successfully support the price of crude oil from further drops.
Does it mean that declines are over? In our opinion, it is not. Why? Firstly, the size of volume during declines is still bigger than during increases, which suggests that oil bears haven’t lost their strength. Secondly, the sell signals generated by the weekly indicators and the daily Stochastic Oscillator remain in play, suggesting that lower prices can’t be ruled out. Thirdly, the black gold still remains under important resistance levels, which means that earlier invalidations of the breakouts and their negative impact on the price are still in effect, supporting oil bears.
Taking all the above into account, we believe that (at least) one more downswing is just around the corner and light crude drops to the medium-term green support line based on the August and November lows or even to the 38.2% Fibonacci retracement based on the entire February 2016 – January 2017 upward move. In this area (around $44.10) the size of the downswing will also correspond to the height of the blue consolidation marked on the weekly chart.
Summing up, short (profitable) positions continue to be justified as crude oil remains under the 200-day and 50-week moving averages and the sell signals generated by the indicators are still in play, which suggests another attempt to move lower.
Very short-term outlook: bearish
Short-term outlook: mixed with bearish bias
MT outlook: mixed
LT outlook: mixed
Trading position (short-term; our opinion): Short positions (with a stop-loss order at $56.45 and an initial downside target at $45.81) are justified from the risk/reward perspective. We will keep you informed should anything change, or should we see a confirmation/invalidation of the above.
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.
Thank you.
Nadia Simmons
Forex & Oil Trading Strategist
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager
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