Oil Trading Alert originally sent to subscribers on October 6, 2014, 8:20 AM.

Trading position (short-term; our opinion): Long positions with a stop-loss order at $86.27 are justified from the risk/reward perspective. Initial price target: $96.

In short, the answer to the title question is that actually not much has changed – at least not since our last Oil Trading Alert was posted. There was a huge reversal on Thursday, and its implications remain in place also today, even though the crude oil price moved a bit lower on Friday (in fact, at the moment of writing these words, crude oil is back above the $90 level). Let’s see what exactly happened and how it fits into our previous long- and short-term outlooks (charts courtesy of http://stockcharts.com.)

From the long-term perspective, we see that the long-term support line held last week, even though we saw a quick move below it. This move hasn’t changed anything because it was not only quick, but also temporary – crude oil price reversed almost immediately and overall crude oil gained on that day (Thursday).

It seems that if it weren’t for the massive rally in the USD Index that we’ve seen on Friday, the rally in crude oil would already be underway. Instead, we saw another daily decline. It’s important to note that crude oil declined relatively insignificantly as compared to the size of the move in the USD Index. In a way, Friday’s decline was a show of strength in the price of “black gold”. All in all, since the long-term support line was not successfully broken, the price of crude oil is likely to move higher in the coming weeks (and perhaps days).

Before moving on to the short-term picture, we would like to draw your attention to the size of the volume that we saw last week’s decline. It was very significant, and when we saw something similar in the past (huge-volume decline after a visible downswing), it meant that the decline is either over or very close to being over. Consequently, the above-mentioned bullish comments are confirmed also from this angle.

From the short-term perspective, our previous comments remain up-to-date and so do the implications:

As you see on the above chart, the situation developed in line with our yesterday’s scenario as crude oil declined [on Thursday] to a fresh multi-month low of $88.18 and then rebounded sharply, invalidating earlier breakdown. This is a strong bullish signal – especially, when we factor in the fact that with this upswing, the commodity invalidated also a breakdown under the long-term support line and the 61.8% Fibonacci retracement (both seen more clearly on the charts below). What’s interesting, despite yesterday’s drop, crude oil didn’t even slipped below the lower border of the declining trend channel, which is another positive sign. On top of that, the volume that accompanied yesterday’s move was huge (the highest since Oct 2012), which signifies to us the real direction in which the commodity is heading. Please note that crude oil reached the upper line of the declining trend channel, which may trigger a pulback from here. However, we believe that even if it appears, it will be shallow and short-lived.

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Looking at the above chart, we see that although crude oil declined below the long-term support line and the 61.8% Fibonacci retracement, this deterioration was only temporarily and the commodity invalidated the breakdown very quickly. As we have pointed out before, this is a strong bullish signal, which suggests that the next sizable move will be to the upside and the final bottom might be in (especially when we factor in the fact that wave 5 is shorter than wave 1). If this is the case, the initial target for oil bulls will be around $95, where the recent high is.

Summing up, it seems that keeping long positions is still justified from the risk/reward perspective as the breakdown below the recent lows and the key medium-term support zone was invalidated very quickly. The decline that we saw on Friday doesn’t seem significant as we haven’t seen a close below the long-term support line, and we just got a bullish signal from the weekly volume. To us, this signifies that the final bottom might be in (or we will see it shortly) and the next sizable move will be to the upside.

Very short-term outlook: bullish
Short-term outlook: mixed with bullish bias
MT outlook: mixed
LT outlook: bullish

Trading position (short-term): Long with a stop-loss order at $86.27. 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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