Oil Trading Alert originally sent to subscribers on August 27, 2014, 9:58 AM.
Trading position (short-term; our opinion): In our opinion no positions are justified from the risk/reward perspective.
On Tuesday, the price of light crude climbed to an intraday high of $94.35 after better-than-expected U.S. economic data. Although the commodity gave us some gains in the following hours, crude oil gained 0.50%. Did this increase change anything in the very short-term picture?
Yesterday, the U.S. Commerce Department showed that total durable goods orders (with transportation items) rose by 22.6% last month, well above expectations for an increase of 7.5%. However, core durable goods orders (wihout volatile transportation items) declined by 0.8% in July, missing forecasts for a 0.5% gain. Despie this dissapointing numbers, the Conference Board reported that its consumer confidence index rose to 92.4 for August, the highest level since October 2007, while analysts had expected the index to decline to 89.0 this month.
These (mostly bullish) economic indicators, fueled hopes that the world's largest economy is gaining steam and will consume more fuel and energy, which resulted in a rally to over $94 per barrel. Nevertheless, concerns that global oil supplies far outsize demand (despite a more robust U.S. economy) capped the gains. At this point, it’s worth noting that the American Petroleum Institute showed that U.S. crude inventories fell by 1.3 million barrels in the week ended August 22, compared to expectations for a decline of 2.5 million barrels. Will the EIA report confirm such drop? Before we know the answer to this question, let’s focus on the technical picture of crude oil (charts courtesy of http://stockcharts.com).
Looking at the charts from the weekly and daily perspective, we clearly see that nothing has really changed. The medium-term picture shows that crude oil still remains below the 200-week moving average and the rising, long-term support line, quite near a seven-month low of $92.50. What about the very short-term outlook? It also remains unchanged as the commodity is trading in a consolidation (marked with blue) between the recent low and the green support/resistance zone. Taking these facts into account, we are convinced that last commentary is up-to-date:
(…) On one hand, if oil bulls manage to push the price above the upper line of the formation, we’ll see an attempt to invalidate the breakdown below the green area. If they succeed, the initial upside target will be around $96.60, where the size of the upswing will correspond to the height of the consolidation (it’s worth noting that slightly above this level is the 38.2% Fibonacci retracement based on the Jul-Aug decline, which may pause further improvement). On the other hand, if crude oil extends losses and drops below the recent low, we’ll see further deterioration and a test of the strength of the Jan low of $91.24. Which scenario is more likely? From the technical point of view, oil bulls have only positive divergences on their side. Meanwhile, their opponents have a breakdown below two very important medium-term support levels and a confirmation of the breakdown below the previous lows and the green area (which serves as the nearest resistance). So, what’s next for crude oil? Taking into account this unclear very short-term technical picture, we think that the next move will appear after the EIA weekly report, which will help oil investors to gauge the strength of oil demand from the world’s largest consumer.
To emphasize that Tuesday’s session didn’t change anything from any perspective, we can summarize the situation today in exactly the same way as we did yesterday:
Summing up, despite yesterday’s price action, the overall situation remains unchanged as crude oil is trading in the consolidation. As we mentioned earlier, the commodity could go both north or south from here, but we think that tomorrow's the EIA report will bring a breakthrough and will indicate the direction of future moves. Meanwhile, staying on the sidelines waiting for another profitable opportunity is the most appropriate investment strategy at the moment.
Very short-term outlook: bearish
Short-term outlook: bearish
MT outlook: bearish
LT outlook: bullish
Trading position (short-term): No positions are justified from the risk/reward perspective at the moment, but we will keep you informed should anything change.
Thank you.
Nadia Simmons
Forex & Oil Trading Strategist
Przemyslaw Radomski, CFA
Founder, Editor-in-chief
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