Trading position (short-term; our opinion; levels for crude oil's continuous futures contract): Small (50% of the regular positions size) short positions are justified from the risk-reward perspective with stop loss $38.63 at and $30.22 as the initial target price.
At the moment of writing these words, crude oil is attempting to break above its 50% Fibonacci retracement level. So far, it has been trading above it for just a few hours, so one better remain skeptical about this move just yet.
At the same time, crude oil moved above the mid-March high that the commodity made right after forming the big price gap.
This means that crude oil will have a hard time confirming this breakout. Invalidating it, on the other hand, would serve as a strong sell signal. Given the recent relatively weak performance of crude oil compared to the stock market, we think that such an invalidation is likely. Once it takes place, it will make the outlook more bearish than it is today.
Moreover, let's keep in mind that crude oil is also right at the lower border of medium-term declining trade channel. This is a strong resistance line and crude oil approached it on relatively low weekly volume.
This is yet another reason to expect a short-term downturn in the following days and perhaps weeks, not another sizable rally. Of course, the situation will clarity once (if?) black gold invalidates its overnight breakout.
For now, the outlook for crude oil is bearish, but not significantly so.
Summing up, we think that small short positions in crude oil are justified right now.
Trading position (short-term; our opinion; levels for crude oil's continuous futures contract): Small (50% of the regular positions size) short positions are justified from the risk-reward perspective with stop loss at $38.63 and $30.22 as the initial target price. The July contract is trading at about $34.98 at the moment of writing these words.
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
