oil price trading


Untangling the Oil Story: Supports, Resistances and Gaps

February 11, 2020, 7:05 AM Nadia Simmons

Trading position (short-term; our opinion): No position is justified from the risk/reward perspective.

Meandering around the $50 mark, crude oil hasn't made a decisive move either way so far. But do the opening gaps tell a convincing story, and do they highlight what to pay attention to? Let's explore their message.

We'll start by taking a closer look at the weekly chart (charts courtesy of http://stockcharts.com).

Let's recall our yesterday's observations:

(...) Has anything important changed on the medium-term chart?

Yes, but only at first glance. What do we mean by that? As you can see on the above chart, crude oil closed the previous week above the previously broken lower border of the red declining trend channel, invalidating the earlier breakdown.

Although this is a bullish development, the price of black gold is still trading below the green zone. Also, the red gap remains open, and it serves as a major short-term resistance. Finally, the sell signals generated by the weekly indicators are still in play, suggesting that one more attempt to move lower can't be ruled out - especially when we factor in the current short-term situation.

The situation developed in tune with our yesterday's assumptions, and crude oil extended losses. And to boot, it opened the week with Monday's bearish gap, which you can see marked in pink on the above chart.

This bearish omen encouraged the sellers to act, triggering further deterioration. As a result, the price of black gold came back below the lower border of the declining red channel. As it stands right now, it decreases chances of a bigger rebound.

How did yesterday's price action affect the daily chart? Let's take a look below.

Quoting our last Oil Trading Alert:

(...) although the buyers took the commodity a bit higher after the market's open, the red gap stopped them for the third time in a row. That just shows how the bears are committed to defending this resistance.

As a result, black gold reversed and declined, which translated into the green gap created at the beginning of Thursday getting closed. Additionally, light crude finished the day below the green zone created by the previous lows, which doesn't bode well for the bulls.

Analyzing the situation in crude oil futures, we also added:

(...) Bulls' weakness on Friday translated into another bearish open today, and you can see the gap marked with pink on the above chart. Although the buyers tried to close it earlier today, they failed. Thus, the gap still remains open at the moment of writing these words. It increases the probability of another downswing in the very near future.

Should it be the case and crude oil futures move lower from here, further deterioration in crude oil after the market's open and a test of the lower border of the mentioned red declining trend channel (seen more clearly on the weekly chart), the last week's low or even a fresh 2020 low, is very likely.

Looking at the daily chart, we see that the situation developed in tune with the above scenario, and crude oil opened the day with another bearish gap, which triggered further deterioration in the following hours.

Thanks to yesterday's drop, the commodity not only slipped below the lower border of the above-mentioned red channel, but also approached last week's low.

Taking a closer look at the crude oil futures chart, we see that the proximity to this support encouraged the bulls to act, and the futures opened today with a turquoise gap.

Is this a positive sign?

Yes, but only at first glance, because the pink gap created yesterday remains in the cards, blocking the way to the north. Additionally, when we focus on the daily chart, we can see that similar price action took place on January 29. Back then, the futures (and also crude oil later in the day) also opened with a bullish gap, but the bearish gap created two days earlier stopped the bulls, triggering a decline in the following hours.

Will we see something similar this time as well?

In our opinion, as long as the pink gap remains open, the bulls and crude oil futures (and crude oil itself) are threatened by further declines. How low could the futures go? If the bears attack, the first downside target will be today's gap. However, if the bulls fail and do not manage to hold it, the way to last week's lows or even a fresh 2020 low will be open.

Summing up, we're not opening any trading positions in crude oil right now, but it seems that we will do so shortly. It a tough call to say whether it's going to be a short or long position, as it depends on what kind of confirmations we get. It would be relatively "convenient" to go long here as crude oil is very oversold from the short-term point of view, but it's too risky right now given the momentum and lack of convincing bullish evidence.

As always, we'll keep you - our subscribers - informed.

Trading position (short-term; our opinion): No position is justified from the risk/reward perspective.

Thank you.

Nadia Simmons

Day Trading and Oil Trading Strategist

Przemyslaw Radomski, CFA

Editor-in-chief, Gold & Silver Fund Manager

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