Trading position (short-term; our opinion): Short positions (with a stop-loss order at $52.52 and the initial downside target at $45.80) are justified from the risk/reward perspective.

On Thursday, crude oil moved a bit higher after Genscape report suggested that oil inventories in Cushing, Oklahoma declined more than a million barrels in the week to August 15. In this environment, light crude bounced off the support area, but will we see further improvement in the coming days?

Crude Oil’s Technical Picture

Let’s take a closer look at the charts and find out (charts courtesy of http://stockcharts.com).

In our Oil Trading Alert posted on August 7, 2017, we wrote the following:

(…) How low could the commodity go?

If light crude moves lower from current levels, the first downside target will be the last week low, which creates the lower border of the blue consolidation (at $48.37). If it is broken, the next downside target for bears will be around $47.25, where the 38.2% Fibonacci retracement based on the entire recent upward move is. However, taking into account all negative above-mentioned factors, we think that light crude will move even lower and test (…) the 50% Fibonacci retracement, which could pause for a bit further declines.

Looking at the daily chart, we see that the situation developed in line with the above scenario and crude oil reached our last downside target yesterday. As you see, this support together with the 50-day moving average encouraged oil bulls to act, which resulted in a small (compared to earlier declines) upswing.

What’s next?

Earlier today, crude oil futures extended yesterday’s gains, which resulted in a climb to an intraday high of $47.38. This suggests that crude oil will likely also move a bit higher after the market’s open (similarly to what we saw in the past). Nevertheless, in our opinion, even if light crude increases to $47.60, the overall situation in the short term will not change and the outlook will remain bearish. Why? Because even if we see such price action, it will be nothing more than a verification of Wednesday’s breakdown below the lower border of the purple rising trend channel.

Why we think so? When we take a closer look at the daily chart, we easily notice that yesterday’s increase materialized on visibly lower volume than earlier declines, which doesn’t confirm oil bulls’ strength. Additionally, the medium-term picture (verification of the breakdown under the 50-week moving average and the current position of the indicators) together with the sell signals generated by the daily indicators suggests further declines.

How low could the black gold go in the coming week?

In our opinion, if light crude reverses and declines below the 50% Fibonacci retracement and the 50-day moving average, we’ll see a drop to around $45.40, where the late July low and the 61.8% Fibonacci retracement are. Nevertheless, taking into account the breakdown under the lower border of the purple rising trend channel, we could see a decline even to the green support zone seen on the daily chart (around $43.65-$44.23), where the size of the downward move will correspond to the height of the trend channel.

Summing up, short profitable positions continue to be justified from the risk/reward perspective as crude oil remains below the lower border of the purple rising trend channel. Therefore, even if we see another upswing later in the day, in our opinion it would be nothing more than a verification of the earlier breakdown. If this is the case, and the black gold reverses, we’ll see lower prices of the commodity in the coming week.

Very short-term outlook: bearish
Short-term outlook: bearish
MT outlook: mixed
LT outlook: mixed

Trading position (short-term; our opinion): Short (already profitable) positions (with a stop-loss order at $52.52 and the initial downside target at $45.80) 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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