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.
It's again one of those days when we have little new to report. Thus, our Friday's observations are still valid today, translated into past tense. Such were they:
(...) We started (...) by writing the following:
Crude oil moved higher recently, likely due to the move lower in the USD Index. However, both moves seem to be of counter-trend nature. The price of black gold moved only very briefly above its resistance at the 38.2% Fibonacci retracement level and - just as briefly - it touched the early-2020 low.
Let's see what happened - that's the chart right in.
Indeed, the move higher seems to have been proved as fake. Crude oil formed a bearish reversal ("shooting star") candlestick, and at the same time it invalidated the intraday breakout above the 38.2% Fibonacci retracement level.
This unsuccessful attempt is by itself a sell signal - it shows that the market was driven by something (the temporary decline in the USDX seems to be the likely candidate), but it didn't really want to move higher. The rally didn't last long and instead of a powerful breakdown, we saw a bearish confirmation.
Consequently, the points that we made previously remain up-to-date:
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.
From the long-term point of view, it's clear how the rally lost steam and buying power dried up. Crude oil verified the breakdown below the 2016, 2017, and 2018 lows by moving back to them and then declining once again. The volume during this upswing was also relatively small suggesting that it won't be long before we see another big decline.
The tiny (but still) sell signal from the Stochastic indicator confirms the bearish outlook for the price of black gold in the near term.
Please note that all the above happened without USD's help. In fact, it happened regardless of USD's continuous decline. Once the USD Index finally rallies (and given today's strength it seems that a bigger move higher in the USDX is underway), crude oil's decline is likely to accelerate.
As a result, keeping the short position intact remains justified from the risk to reward point of view in our opinion.
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
