Trading position (short-term; our opinion): Small (half of the regular size) short positions (with a stop-loss order at $61.13 and the initial downside target at $52) are justified from the risk/reward perspective.
On Wednesday, the government data showed that U.S. crude oil inventories fell by 5.1 million barrels, easily beating analysts’ forecasts. Although it was the fourth consecutive week of decline, the price of black gold moved lower and the commodity lost almost 1%. What encouraged oil bears to act?
As we mentioned earlier, although the Energy Information Agency reported that crude oil inventories declined once again, the report also showed that gasoline inventories rose by 5.7 million barrels, well above expectations for rise of 2.5 million barrels. Additionally, crude oil output jumped by 73,000 barrels a day to 9.78 million barrels per day, approaching output to levels of top producers - Russia and Saudi Arabia. This bearish news outweighed a larger-than-expected drop in crude oil stockpiles and affected negatively investors’ sentiment. As a result, light crude closed the day under $57. What will oil bears do next?
Crude Oil’s Technical Picture
Before we know the answer to this question let’s examine the technical picture of crude oil (charts courtesy of http://stockcharts.com).
In our yesterday Oil Trading Alert, we wrote the following:
(…) crude oil verified the earlier breakdown under the upper line of the black trend channel yesterday. Thanks to the increase, which we saw after the market open, black gold also touched the upper line of the very short-term blue declining trend channel, which together with the above-mentioned verification of the breakdown triggered a bigger pullback in the following hours.
(…) oil bears erased all Monday gains and created the bearish engulfing pattern on the daily chart, which doesn’t bode well for higher prices. How can we interpret this situation from the psychological point of view? Those traders, who had long positions decided to close them after an increase to the upper line of the trend channel, which resulted in a decline. Those who joined the last part of the upward move didn’t withstand the pressure and began to close their positions in fear of losses, which caused that the price of crude oil continued to fall.
(...) in our opinion, the bearish engulfing pattern is an additional signal for investors to open more short positions, which due to the absence of the opposite side (the previous ones who closed their positions due to fear of losses will not re-open them in the same direction) will push the price even lower in the coming week.
From today’s point of view, we see that the situation developed in tune with our assumptions and black gold extended losses, making our short positions profitable.
What’s next for Light Crude?
Taking into yesterday’s price action and the sell signals generated by the indicators (the Stochastic Oscillator re-generated the sell signal) we believe that the best answer to this question will be the quotes from our last Oil Trading Alert:
(…) In our opinion, if light crude extends losses from current levels, we’ll see (at least) a drop to around $54.81-$55.24, where the January peak, the mid-November lows and the lower border of the very short-term blue declining trend channel are. If this support area is broken, the way to lever levels will be open.
At this point it is worth nothing that the pro bearish scenario is also reinforced by (…) the current situation in the medium term. Let’s take a closer look at the chart below.
(…) although crude oil rebounded at the beginning of the week, black gold pulled back, which resulted in a comeback under the 200-week moving average. Additionally, the current position of the indicators (the sell signals generated by the RSI and the Stochastic Oscillator remain in cards, while the CCI is getting closer to doing the same) also supports oil bears and lower prices of light crude in the near future.
Finishing today’s alert, please note that the weekly CCI generated the sell signal after yesterday’s session, giving oil bears another reason to act. On top of that, we would like to draw your attention to the International Energy Agency report. Earlier today, the agency warned against the possibility of further increases in U.S. crude oil production in the coming year. As a result, crude oil futures extended yesterday’s decline, which significantly increases the probability of further deterioration later in the day (as crude oil usually follows the futures after the market open).
Summing up, short positions continue to be justified from the risk/reward perspective as crude oil extended decline under the upper line of the black rising trend channel and invalidated the earlier breakout above the 200-week moving average. Additionally, the sell signals generated by the weekly indicators together with the bearish fundamental factors increase the probability of further declines in the coming week(s).
Very short-term outlook: bearish
Short-term outlook: mixed with bearish bias
MT outlook: mixed
LT outlook: mixed
Trading position (short-term; our opinion): Small (half of the regular size) short positions (with a stop-loss order at $61.13 and the initial downside target at $52) are justified from the risk/reward perspective. We will keep you – our subscribers – informed should anything change.
As a reminder – “initial target price” means exactly that – an “initial” one, it’s not a price level at which we suggest closing positions. If this becomes the case (like it did in the previous trade) we will refer to these levels as levels of exit orders (exactly as we’ve done previously). Stop-loss levels, however, are naturally not “initial”, but something that, in our opinion, might be entered as an order.
Thank you.
Nadia Simmons
Forex & Oil Trading Strategist
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager
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