Trading position (short-term; our opinion; levels for crude oil’s continuous futures contract): Short positions have become justified from the risk to reward point of view, as crude oil futures moved below $52.97. In this case, we view a short position with $55.62 as a stop-loss and $28.12 as the initial price target.
Oil prices rose slightly today, but gains have been largely capped by continued travel restrictions and chaotic vaccine distribution. A Reuters poll last Friday (Jan. 29) showed that “oil prices will hover around current levels for much of the year before a recovery gains traction into end-2021 as vaccines help demand gradually emerge from the depths of the coronavirus pandemic.
The black gold declined last Tuesday (Jan. 26), with WTI crude dropping below $52.45, thus touching our entry price, which means that we see short positions as being justified. Our analysis and trading positions currently remain unchanged. The chart remains the same from January 25th.
On January 22 crude oil declined below the rising support line and even though it rallied back up, it was unable to end the week back above the line.
The situation is bearish enough to open short positions. I’m usually waiting to see three daily closes below a certain price level to say that the breakdown below it is confirmed. In this case, however, we saw a weekly close below the support line, which by itself can confirm a breakdown.
If it was the only thing that was going on right now, I would probably not open the short position here, however, it’s not the only thing that’s going on right now. The stock market appears to be topping or is very close to making the final top, and since crude oil tends to move together with the stock market (at least the big moves), we are in a situation where the weekly confirmation of the breakdown should be viewed as sufficient.
The bottoming USD Index also provides bearish context for crude oil:
Given how ugly the situation might become in the stock market, and how bullish the situation might turn out in case of the USD Index, I don’t see a prolonged uptrend in crude oil prices from here. The biggest opportunity is likely to be in catching the next wave down, but if crude oil proves that it can really be strong in the short run, we might want to catch this short-term move to.
It’s all based on the risk to reward relation – if enough factors point to the same direction, opening a trade might be a good idea, even if it is against the bigger trend. The “don’t fight the trend” rule is useful, but one needs to keep in mind that there are multiple trends in place at the same time – the short-term trend can be different than the medium-term one, and the same goes with the long-term one (or immediate-term one).
To summarize, it seems that crude oil has begun its next big move lower, thus justifying opening short positions.
As always, we’ll keep you, our subscribers well informed.
Trading position (short-term; our opinion; levels for crude oil’s continuous futures contract): Short positions have become justified from the risk to reward point of view, as crude oil futures moved below $52.97. In this case, we view a short position with $55.62 as a stop-loss and $28.12 as the initial price target.
Thank you.
Przemyslaw Radomski, CFA
Founder, Editor-in-chief
