Oil Trading Alert originally sent to subscribers on July 1, 2015, 9:52 AM.
Trading position (short-term; our opinion): Short positions with a stop-loss order at $65.23 are justified from the risk/reward perspective.
On Tuesday, crude oil gained 1.41% ahead of weekly API supply data, but did this upswing change anything in the short-term picture of the commodity?
On Friday, the Baker Hughes report showed another drop in U.S. oil rigs, which in combination with the fact that U.S. stockpiles typically fall at this time of year supported the price of light crude, fueling hopes that the API and EIA reports would show another decline in domestic crude oil inventories. Thanks to these circumstances, the commodity climbed above the short-term support/resistance line, invalidating earlier breakdown. Did this move change the very short-term picture? (charts courtesy of http://stockcharts.com).
The situation in the long term remains almost unchanged (crude oil moved little higher, but this move is barely visible from this perspective), which means that what we wrote on Monday is up-to-date:
(...) this year’s rally is simply a sizable correction of the previous massive decline. Taking into account the fact that there was no major breakout and the trend remains down, it seems that the short-term outlook would deteriorate, as crude oil didn’t move above the long-term rising resistance line and the 200-month moving average.
How yesterday’s move affect the very short-term picture? Let’s examine the daily chart and find out.
In our yesterday’s commentary on the medium-term outlook, we wrote the following:
(…) crude oil is trading in a blue triangle around the green support zone (created by the Dec 15 and Dec 22 highs). With yesterday’s downswing light crude slipped to the lower border of the formation, which suggests that we could see a rebound from here in the coming day(s).
Looking at the daily chart, we see that oil bulls pushed the commodity higher as we had expected. With this upswing, light crude climbed above the short-term green support line, invalidating earlier breakdown. But is this event as positive as it seems at the first sight? Not really, because despite this improvement crude oil closed another day under the previously-broken 50-day moving average (which serves as important resistance). This suggests that yesterday’s upswing was nothing more than a verification of the breakdown.
If this is the case, and light crude moves lower from here once again, it would be a bearish signal, which will trigger further deterioration. What will be the initial downside target? We think that the best answer to this question will be quotes from our previous Oil Trading Alert:
(…) the previous lows ($56.50-$57.60) or even the green support line (around $56).
(…) Nevertheless, to have a more complete picture of the commodity we also take a closer look at the weekly chart (…) taking into account the current position of the weekly indicators (sell signals remain in place, supporting oil bears), we think that (…) declines will accelerate if crude oil drops below the lower line of the triangle (currently around $58). In this case, the initial downside target for oil bears would be around $52.34-$54.24, where the green support zone (created by the Feb highs) is.
Please note that this scenario is also reinforced by the current position of daily indicators (sell signals remain in place) and the size of volume that accompanied yesterday’s move (it was smaller than the day before when crude oil declined, which suggests that oil bulls may not be as strong as it seems).
Summing up, although crude oil invalidated earlier breakdown below the support line, the commodity closed another day below the 50-day moving, which makes the outlook even more bearish and suggests further deterioration in the coming day(s).
Very short-term outlook: bearish
Short-term outlook: bearish
MT outlook: mixed with bearish bias
LT outlook: mixed with bearish bias
Trading position (short-term; our opinion): Short positions with a stop-loss order at $65.23 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
Gold & Silver Trading Alerts
Forex Trading Alerts
Oil Investment Updates
Oil Trading Alerts
