Trading position (short-term; our opinion): No positions are justified from the risk/reward perspective.

Crude oil is finally showing some signs of strength. "Black gold" refused to decline even after USD Index moved to new highs for a few days in a row. Is the turnaround just around the corner?

We’ll start today’s Oil Trading Alert with taking a look at the chart that we featured yesterday as the last one – the USD Index. The situation in it changed in a quite visible way. Let’s take a closer look (charts courtesy of http://stockcharts.com).

In today’s Gold & Silver Trading Alert we wrote the following regarding the above chart:

The USD Index has just encountered the major resistance line that it needs to surpass before a rally to 92 becomes very probable – the 38.2% Fibonacci retracement levels based on the entire 2002 – 2008 decline.

The Fibonacci retracements have worked in the USD Index many times in the past, so it could be the case that this level will keep the rally in check for some time. If not, and we see a confirmed breakout, then we’ll likely see another big rally – to the 92 level or perhaps even to the next retracement at 96.11.

The important thing here is that a correction of the recent rally would make crude oil more attractive among investors holding currencies other than the US Dollar, which would very likely translate to higher prices of the commodity.

With this in mind, let’s take a look at long- and short-term charts featuring crude oil prices.

In short, there were no visible changes in the crude oil picture. The “black gold” price moved a bit higher yesterday, but it remains in a consolidation (marked with blue) between the 38.2% Fibonacci retracement (based on the entire Dec decline) and the recent lows. Taking this fact into account, we believe that our last commentary is up-to-date:

(…) crude oil is still trading in a narrow range between the 38.2% Fibonacci retracement (based on the entire Dec decline) the (…) support zone. Therefore, we think that as long as there is no successful breakout above this resistance (or breakdown under this support), opening any positions is not justified from the risk/reward perspective. The reason? When we take a closer look at the daily chart, we see that there was a bigger and sharp corrective upswing at the beginning of the month. Back then, although crude oil corrected over 38.2% of earlier downward move, oil bulls didn’t manage to push the commodity higher, which translated to a fresh 2014 low. Therefore, we think that a trend reversal (and an upward move to the initial upside target around $70) will be likely only if we see an upswing above $59.50, which won’t be followed by a fresh low. Until this time, another pullback and test of the recent low is likely.

Before we summarize today’s alert, we would like to draw your attention to the U.S. dollar – crude oil link. As you see on the daily chart, although the greenback extended gains in the recent days, hitting fresh 2014 highs, crude oil didn’t drop to a new low. Instead, the commodity has been trading in the consolidation, which may be the first sign of strength. Taking this important event into account, we can initially assume that even if the U.S. currency moves higher, it will not necessarily translate into lower values of crude oil.

It seems that we have seen the latter yesterday, when crude oil managed not to decline despite US dollar’s new high.

Overall, we can summarize the situation in the crude oil market in the same way as we’ve summarized it yesterday.

Summing up, although crude reversed and declined sharply, the overall situation in the commodity hasn’t changed much as light crude is trading in a narrow range. Nevertheless, if oil bulls manage to push light crude above the 38.2% Fibonacci retracement (based on the entire Dec decline), we’ll consider opening long positions. Until this time, no positions are justified from the risk/reward perspective.

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

Trading position (short-term; our opinion): No positions are justified from the risk/reward perspective at the moment, but we will keep you informed should anything change.

On an administrative note, there will be no alerts on Thursday (Dec. 25) and Friday (Dec. 26) this week. We will start posting them again on Monday, Dec. 29.

Thank you.

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

Gold & Silver Trading Alerts
Forex Trading Alerts
Oil Investment Updates
Oil Trading Alerts