Trading position (short-term; our opinion; levels for crude oil's continuous futures contract): Full (100% of the regular position size) speculative short positions in crude oil are justified from the risk to reward point of view stop loss $45.63 at and $30.22 as the initial target price.
Based on last week's action and today's pre-market trading in the oil arena, we have little new to report to you - that is, there hadn't been any change in outlook. In fact, given that crude oil refused to rally despite continuation of the decline in the USD Index, the bearish outlook was confirmed. Consequently, the points made on Wednesday and Tuesday remain valid also today:
In short - crude oil reversed and then started to move sideways below the 61.8 % Fibonacci retracement level.
This means that the odds continue to favor a move lower from here.
Our stop-loss level is slightly above $45, which means that it's above the early-March levels. If this level - and the 61.8% Fibonacci retracement based on the entire 2020 decline - is broken in a meaningful manner, the SL order would take you us of the market - and correctly so, as it would imply that the outlook is no longer nearly as bearish as it is right now. This hasn't happened yet. In fact, based on the most recent invalidation, the bearish outlook just got a fresh bearish confirmation.
The trigger for crude oil's decline might be the rally in the USD Index. USD's quick rally in the first half of March was accompanied by a substantial slide in crude oil prices.
Remember when in early 2018 we wrote that the USD Index was bottoming due to a very powerful combination of support levels? Practically nobody wanted to read that as everyone "knew" that the USD Index is going to fall below 80. We were notified that people were hating on us in some blog comments for disclosing our opinion - that the USD Index was bottoming. People were very unhappy with us writing that day after day, even though the USD Index refused to soar.
Well, it's the same right now.
The USD Index is at a powerful combination of support levels. One of them is the rising, long-term, red support line that's based on the 2014 and 2018 bottoms. The other support levels are visible once we zoom in a bit.
The USD Index just moved slightly below the 38.2% Fibonacci retracement level that's based on the 2014 - 2020 rally, and below the 61.8% Fibonacci retracement level that's based on the 2018- 2020 rally.
Each of these retracements is powerful on its own, but taking them both into account and then combining them with a rising long-term support line creates a very powerful support.
A rally in the USD Index would likely translate into a bigger decline in crude oil, and since the former appears likely, so does the latter.
Consequently, in our opinion, keeping the short position intact remains justified from the risk to reward point of view.
Summing up, the short-term outlook for crude oil is bearish based on both the technical indications and on the rapidly increasing Covid-19 cases in the U.S., and we see signs that the bigger decline is likely to finally start.
As always, we'll keep you - our subscribers - informed.
Trading position (short-term; our opinion; levels for crude oil's continuous futures contract): Full (100% of the regular position size) speculative short positions in crude oil are justified from the risk to reward point of view stop loss $45.63 at and $30.22 as the initial target price.
In case of the futures contracts that are more distant than the current contract, we think that adding the premium (difference between the July and other contracts) to both: stop-loss and initial target prices is justified.
Thank you.
Nadia Simmons
Day Trading and Oil Trading Strategist
Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager
