Oil Trading Alert originally sent to subscribers on April 16, 2014, 9:26 AM.
Trading position (short-term; our opinion): no positions are justified from the risk/reward perspective.
On Tuesday, crude oil gained 0.22% as stronger-than-expected U.S. economic data weighted on the price. Thanks to these solid numbers, the commodity closed the day above the medium-term resistance line, but how reliable this breakout is?
Yesterday, the Labor Department showed that the consumer price index rose 0.2% in March (above expectations for a 0.1% increase), while the on-year rate rose 1.5% in the previous month, beating estimates for a 1.4% gain. Additionally, the core consumer price index (without volatile food and energy items) rose 0.2% last month (also above forecast of a 0.1% gain), while the on-year core consumer prices index rose 1,7%, beating expectations for the index to remain unchanged at 1.6%. Thanks to these better-than-expected numbers, the commodity moved higher, but reports that crude shipments will resume from key Libyan ports capped the gains.
Having discussed the above, let’s move on to the technical changes in the crude oil market (charts courtesy of http://stockcharts.com.)
Looking at the weekly chart, we don’t see any changes at the first glance. However, crude oil broke above the medium-term resistance line based on the September and March highs (which is also the upper line of a triangle) yesterday. According to theory, such price action should trigger further improvement and an increase to around $108, where the long-term resistance line (marked with red) is (you could read this bullish scenario in our previous Oil Trading Alert). However, taking into account the size of the upswing it’s too early to say that this breakout is reliable.
To see the current situation in crude oil more clearly, let’s zoom in on our picture and move on to the daily chart.
In our last Oil Trading Alert, we wrote the following:
(…) crude oil dropped not only below the black resistance line, but also under the upper line of the rising trend channel (marked with black dashed lines), which is a bearish signal. However, taking into account the fact that we saw similar price action on Friday, another attempt to break above the medium-term resistance line can’t be ruled out.
Looking at the above chart, we see that although crude oil slipped below the medium-term resistance line after the market open, oil bulls didn’t give up and pushed the commodity higher. With this upswing light crude came back above the major resistance and reached the upper line of the rising trend channel. As you see on the above chart, for the firt time in three days, crude oil closed the day above the medium-term resistance line, which is a strong bullish signal. Despite this positive event, we should keep in mind that the breakout is not confirmed at the moment. Additionally, as mentioined earlier, the size of the upswing is too small to say that this breakout is reliable. If we see two consecutive closing above this line (or a significant upward move on high volume), the breakout will be confirmed and we likely see further improvement and an increase to (at least) the 2014 high. Nevertheless, the volume that accompanied yesterday’s upswing was smaller than the day before, which questions the strength of the buyers. Additionally, the positon of the indicators, doesn't look bullish at the moment. Therefore, if buyers do not manage to push the price higher, we may see a pullback and an invalidation of the breakout in the near future.
Summing up, at the first glance, the situation has improved as crude oil broke above the medium- term resistance. However, yesterday’s upswing materialized on relative small volume, which questions the reliability of the breakout. If oil bulls do not give up and light crude extends gains, we will likely see an upward move to the 2014 high. However, if they fail, may see a pullback and an invalidation of the breakout in the near future.
Very short-term outlook: mixed
Short-term outlook: mixed
MT outlook: mixed
LT outlook: mixed
Trading position (short-term): Although crude oil moved above the medium-term resistance line, the size of the upswing and the volume that accompanied this move question the reliability of the breakout. Therefore, in our opinion, it seems justified to wait for a confirmation of the breakout before opening long positions. We will keep you informed should anything change, or should we see a confirmation/invalidation of the above.
Thank you.
Nadia Simmons
Forex & Oil Trading Strategist
Przemyslaw Radomski, CFA
Founder, Editor-in-chief
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