Trading position (short-term; our opinion): No positions are justified from the risk/reward perspective.
On Friday, crude oil gained 4.03% and closed the week slightly below $53. What impact did this rally have on the technical picture of the commodity?
Let’s examine the charts below to find out (charts courtesy of http://stockcharts.com).
On the weekly chart we see that although crude oil moved lower at the beginning of the previous week, oil bulls stopped further deterioration and triggered a rebound, which took the commodity above the long-term red resistance line. In this way, light crude invalidated earlier breakdown under this important line, which is a positive sign. Nevertheless, the last week’s upward move materialized on smaller volume than earlier declines, which raises some doubts about further rises.
Will the very short-term chart give us more clues about future moves? Let’s check.
On Friday, we wrote the following:
(…) the commodity slipped under the barrier of $50, but this move was only temporary and light crude closed the day above this important level. In this way, light crude invalidated this tiny breakdown, which resulted in a rebound (…) Taking this fact into account, it seems that the commodity could climb to the previously-broken red resistance line or even to the medium-term black resistance line (currently around $53.89) and verified the breakdown in the following days.
Looking at the daily chart, we see that the situation developed in tune with the above scenario and crude oil moved higher, climbing above the red resistance line and invalidating earlier breakdown. Although this is a positive event that suggests further improvement and a test of the medium-term black resistance line, we should keep in mind that sell signals generated by the CCI and Stochastic Oscillator remain in place, suggesting another attempt to move lower. Additionally the size of volume that accompanied Friday’s increase was tiny, which doesn’t confirm oil bulls’ strength and increases the probability of reversal in near future.
On top of that, the current situation in the oil-to-socks ratio also supports oil bears and lower prices of the black gold.
From the medium-term perspective, we see that although the ratio rebounded in the previous week, the medium-term red resistance line continues to keep gains in check. As you see, it was strong enough to stop further improvement in Oct, which increases the probability that we’ll see another pullback from here – especially when we factor in the fact that the size of volume was visibly smaller compared to what we saw at the beginning of the month during declines. What’s interesting, Friday’s increase materialized on tiny volume (the lowest volume since months), which doesn’t bode well for further rally.
Additionally, from this perspective, we see that sell signals generated by the indicators continue to support oil bears, suggesting lower values of the ratio and crude oil in the following days.
Summing up, although crude oil rebounded sharply on Friday, the outlook for the commodity is still more bearish than bullish as the black gold remains below 3 resistance lines. Additionally, the picture that emerges from the oil-to-stocks ratio increases the probability of reversal in the following days (even if we see a verification of the breakdown under the black resistance line first).
Very short-term outlook: mixed with bearish bias
Short-term outlook: mixed
MT outlook: mixed
LT outlook: mixed
Trading position (short-term; our opinion): No positions 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, Gold & Silver Fund Manager
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