Trading position (short-term; our opinion): Short positions with a stop-loss order at $54.12 and initial (!) target price at $35.72 are justified from the risk/reward perspective.

Although light crude moved sharply lower at the beginning of yesterday’s session weakened by larger-than-expected build in crude oil inventories, the commodity reversed and gained 1.23% later in the day. Is this just a one-day rally or the end of recent declines?

Yesterday, the U.S. Energy Information Administration reported that U.S. crude inventories for the week ending on Oct. 9 surged by 7.6 million barrels, which was more than double the build of 2.9 million barrels expected by analysts. Thanks to these bearish numbers, the commodity declined sharply and hit an intraday low of $45.23. Despite this drop, investors digested that yesterday’s build was lower than the 9.3 million barrels increase indicated by American Petroleum Institute, which in combination with a 2.6 million barrels drop in gasoline stockpiles triggered a rebound in the following hours. Will we see further improvement in the coming day? Let’s take a look at the charts and find out (charts courtesy of http://stockcharts.com).

Quoting our Wednesday’s alert:

(…) light crude slipped under $47, invalidating earlier breakout above the 38.2% Fibonacci retracement, which is an additional bearish sign that suggest that (…) If (…) light crude declines from here, the initial downside target would be (…) the previously-broken upper border of the declining blue trend channel

Looking at the daily chart from today’s point of view, we see that the situation developed in line with the above scenario and crude oil declined to our first downside target yesterday. As you see, this support encouraged oil bulls to act, which resulted in a rebound to an intraday high of $47.02. Despite this increase, light crude remains under the previously-broken 38.2% Fibonacci retracement, which suggests that oil bulls are not as strong as it seems at the first glance (especially when we factor in the fact that the size of volume that accompanied yesterday’s increase was smaller compared to what we saw during recent declines).

Additionally, sell signals generated by the indicators suggest that further deterioration is just around the corner and reversal in the coming day(s) should not surprise us.

Did this move have any impact on the weekly picture of the commodity?

Not really, because as you see on the weekly chart, the commodity is still trading well below the red resistance zone created by the barrier of $50, the long-term resistance line (based on weekly opening prices) and the 50% Fibonacci retracement, which continues to keep gains in check.

Summing up, crude oil reached our first downside target and rebounded. Despite this increase, the commodity remains under the previously-broken 38.2% Fibonacci retracement and well below the red resistance zone (marked on the weekly chart). Taking these fact into account, and combining it with sell signals generated by the daily indictors, we believe that further deterioration is more likely than not and short positions continue to be justified from the risk/reward point of view.

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 $54.12 and initial (!) target price at $35.72 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

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