Oil Trading Alert originally sent to subscribers on October 1, 2014, 9:54 AM.
Trading position (short-term; our opinion): Long positions with a stop-loss order at $89 are justified from the risk/reward perspective. Initial price target: $96.
On Tuesday, crude oil lost 3.18% as the combination of disappointing data from U.S. and euro zone weighed on the price. Additionally, report that OPEC production increased higher than expected watered down the commodity as well. In this environment, light crude reversed and declined sharply, erasing almost all recent rally. Is the situation as bearish as it looks at the first sight?
Yesterday, data showed that consumer price inflation in the euro zone fell to 0.3% in September from 0.4% in the previous month. Thanks to these disappointing numbers, the greenback extended rally, making crude oil less attractive on dollar-denominated exchanges.
Additionally, later in the day, the Conference Board reported that its consumer confidence index declined to 86.0 this month, while analysts expected a drop to 92.5 in September. A separate report showed that a Chicago-area PMI dropped to 60.5 this month, missing analysts expectations for a decline to 61.9.
On top of that, the OPEC’s crude oil supplies increased to its highest level in nearly two years as Saudi Arabia and Libya have increased production by 810,000 barrels per day.
The combination of these three factors triggered a sharp correction, which almost erased the recent rally. What’s next?(charts courtesy of http://stockcharts.com).
Looking at the above chart we clearly see that the very short-term situation has deteriorated as crude oil reversed after an increase to the first resistance area created by the mid-September highs. As a result, the commodity declined sharply and approached the support zone based on the recent lows. With this pullback crude oil not only invalidated a breakout above the green, dashed support/resistance line, but also above the upper border of the declining trend channel. But is the situation as bearish as it seems at the first glance? We think that the best answer to this question will be the long- and medium-term charts. Let’s take a closer look.
From these perspectives, we see that although oil bears managed to erase almost all of the recent rally, crude oil still remains above the key support zone created by the long-term declining support line and the 61.8% Fibonacci retracement. This area is also supported by the Jan and Sep lows. Therefore, we are convinced that as long as there is no breakdown below this strong support another sizable downward move is not likely to be seen. Please note that buy signals generated by the weekly indicators remain in place supporting the bullish case. Taking all the above into account, we think that the next move will be to the upside and the initial target would be the resistance zone around $95, which stopped the rally yesterday.
Summing up, although crude oil moved sharply lower, erasing the recent rally, we are convinced that keeping long positions is still justified from the risk/reward perspective as the medium-term key support zone still holds.
Very short-term outlook: bullish
Short-term outlook: mixed with bullish bias
MT outlook: mixed
LT outlook: bullish
Trading position (short-term; our opinion): Long with a stop-loss order at $89. 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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