Trading position (short-term; our opinion): No positions are justified from the risk/reward perspective. We will probably re-open the short positions shortly, but we are not doing so today.

On Wednesday, crude oil extended losses after larger-than-expected increase in crude oil inventories. Thanks to these circumstances, light crude closed anther day below important support lines. Where will the commodity head next?

Although the EIA reported that gasoline and distillate inventories decreased, yesterday’s report also showed that crude oil stockpiles rose by 14.4 million barrels in the week ended October 28. This was the biggest increase in crude supplies in the U.S. since at least 1984 last week, which affected negatively investors’ sentiment and pushed the commodity lower. Where will the commodity head next?

Let’s take a closer look at the daily chart and try to find out (charts courtesy of http://stockcharts.com).

Looking at the daily chart, we see that although crude oil extended losses below the black rising line (based on the Feb, Aug and Sep lows), the commodity approached the first green support zone (created by the late Sep lows and the 61.8% Fibonacci retracement based on the Aug-Oct upward move), which could stop (or at least pause) declines in the coming day(s). Therefore, we believe that our previous comments remain up-to-date also today:

(…) let’s keep in mind that no market moves in a straight line without period corrections and it appears that after about 2 weeks of almost daily declines, crude oil will finally bounce.

We have not yet seen a decisive buy signal from Stochastic, but it’s already below 10 and CCI is extremely oversold. The above combination makes a rebound quite likely and in light of the above-mentioned breakdown, a move back to the $46.50 or so (the rising red support / resistance line) would be quite likely. If seen, it would most likely provide us with another shorting opportunity at favorable risk to reward ratio. At this time the risk appears to be too high due to the likelihood of seeing a rebound. After breakdown is verified, the likelihood of seeing a bigger upswing will be much lower.

The above likelihood is currently increased by a good possibility of seeing a turnaround on the currency markets and in case of the precious metals sector. Since no market moves totally on its own, it could easily be the case that turnarounds in the above-mentioned markets would translate into a turnaround in crude oil. Therefore, it seems that waiting for additional bearish confirmations before re-opening short positions appears justified at this time. As always, we’ll keep you – our subscribers – updated.

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

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