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, the black gold lost 1% after the U.S. Energy Information Administration's drilling productivity report indicated that May output could rise by 123,000 barrels per day to 5.19 million bpd. Thanks to this news, light crude slipped under the previously-broken resistance line, invalidating the earlier breakout. What does it mean for the commodity?

Let’s examine the charts below (charts courtesy of http://stockcharts.com).

On the medium-term chart, we see that crude moved lower and slipped to the previously-broken long-term red support/resistance line, which suggests that what we wrote yesterday is up-to-date:

(…) although crude oil moved a bit higher in the previous week, the commodity is still trading under the long-term rising resistance line based on the February and November lows, which suggests that the recent increases could be nothing more than a verification of the earlier breakdown and as long as there is no invalidation of the breakdown reversal and lower prices are more likely than not.

This scenario is also reinforced by the size of the recent candlesticks. As you see on the chart, from week to week, their bodies were getting smaller, suggesting that oil bulls are losing strength. We saw a similar situation in October (we marked both of them with blue). Back then, smaller bodies materialized on decreasing volume preceded a reversal and a bigger decline, which increases the probability that we’ll see a similar situation in the coming weeks.

Are there any other negative signals, which could encourage oil bears to act? Let’s examine the very short-term chart and find out.

Quoting our previous alert:

(…) Friday’s increase materialized on smaller volume than Thursday’s decline, which suggests that oil bulls may not be as strong as it seems. On top of that, the RSI approached the level of 70 – similarly to what we saw in August and October. In both cases, such increases preceded reversals and lower values of crude oil. There is also a negative divergence between the CCI and the price, which together with the sell signal generated by the Stochastic Oscillator increases the probability of declines in very near future.

From today’s point of view, we see that the situation developed in line with the above scenario and the black gold declined yesterday. Thanks to this drop light crude slipped below the previously-broken lower border of the black rising trend channel, invalidating the earlier breakout. This is a bearish development, which suggests further deterioration – especially when we factor in the fact that the CCI also generated the sell signal, supporting oil bears and lower prices of light crude.

How low could the commodity go in the coming days? In our opinion, the initial downside target will be around $52.16, where the 23.6% Fibonacci retracement based on the entire March-April upward move is. If this support is broken, the next targets for oil bears will be around: $51.18 (the 38.2% retracement), $50.38 (the 50% retracement), the barrier of $50 and $49.58 (the 61.8% retracement).

Summing up, short positions continue to be justified as crude oil invalidated the earlier breakout above the lower border of the black rising trend channel, which could encourage oil bears to act and trigger another downswing in the coming day(s) – similarly to what we saw in the past.

Very short-term outlook: bearish
Short-term outlook: bearish
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.

Thank you.

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

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