Oil Trading Alert originally sent to subscribers on November 23, 2015, 7:12 AM.
Trading position (short-term; our opinion): Short positions with a stop-loss order at $54.12 and initial (!) target price at $35.72 are justified from the risk/reward perspective.
Although crude oil increased after Baker Hughes report, the combination of a stronger greenback and ongoing worries over a supply glut encouraged oil bears to act. In this way, light crude lost 0.93% and invalidated small breakout above the short-term resistance. Will this negative signal trigger further deterioration in the coming week?
On Friday, Baker Hughes reported that U.S. oil rigs fell by 10 last week to 564, which triggered a sharp increase to an intraday high of $42.76. Despite this improvement, a stronger greenback (supported by increasing expectations for a December rate hike by the Federal Reserve) in combination with ongoing worries over a supply glut stopped oil bulls, which resulted in another pullback below the short-term resistance line. Will this negative signal trigger further deterioration in the coming week? Let’s examine charts and find out (charts courtesy of http://stockcharts.com).
Looking at the above chart we see that crude oil closed another week under the previously-broken blue zone (reinforced by the blue line), which in combination with a sell signal generated by the Stochastic Oscillator suggests further deterioration in the coming week.
Will the daily chart confirm this bearish scenario? Let’s check.
From this perspective we see that although light crude moved higher after the market’s open, oil bulls didn’t manage to hold gained levels, which triggered a pullback. With this downswing, crude oil invalidated earlier small breakout above the black resistance line, which is a bearish signal that suggests further deterioration – especially when we factor in the size of volume that accompanied Friday’s decline (it was bigger than what we saw in previous days).
Taking all the above into account, we believe that what we wrote last Tuesday is still up-to-date:
(…) the commodity climbed to the black resistance line, which could be the neck line of a potential head and shoulders formation. If this is the case and crude oil declines from here, we’ll see a drop below $40 in the coming days. At this point, it is worth noting that if we see such price action, the current decline will likely accelerate, which will likely translate to a test of the Aug lows.
Nevertheless, taking into account the above-mentioned bearish pattern, we may see a decline even to around $35.50, where the size of the downward move will correspond to the height of the formation.
(…) the daily Stochastic Oscillator generated a buy signal, which may result in another test of the black resistance line in the coming day.
Summing up, the first resistance line continues to keep gains in check, which increases the probability that the potential head and shoulders formation (marked on the daily chart) is underway. If this is the case, we’ll see further deterioration in the coming weeks Therefore, we believe that short positions (which are already profitable as we opened them when crude oil was trading around $46.69) continue to be justified from the risk/reward point of view.
Very short-term outlook: bearish
Short-term outlook: bearish
MT outlook: bearish
LT outlook: mixed with bearish bias
Trading position (short-term; our opinion): Short positions with a stop-loss order at $54.12 and initial (!) target price at $35.72 are justified from the risk/reward perspective. We will keep you – our subscribers – informed should anything change.
Thank you.
Nadia Simmons
Forex & Oil Trading Strategist
Przemyslaw Radomski, CFA
Founder, Editor-in-chief
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