Trading position (short-term; our opinion): No positions are justified from the risk/reward perspective.

On Wednesday, black gold lost 3% and declined under two medium-term support lines after the Energy Informational Administration’s report showed that crude oil inventories unexpectedly increased by 6.8 million barrels in the week ending Aug 10. Although these are negative factors, which suggest further deterioration, there is one but…

Let’s examine the charts below (charts courtesy of http://stockcharts.com).

Technical Picture of Crude Oil

In our yesterday’s Oil Trading Alert, we wrote the following:

(…) another unsuccessful attempt to go above the back dotted line based on July peaks. (…) oil bulls (…) weakness, resulted in a sharp pullback, which took the price of light crude under the above-mentioned back dotted resistance line. In this way, oil bears invalidated the earlier small breakout and closed another day below this nearest resistance, which doesn’t bode well for their opponent and higher values of crude oil.

What can this mean for black gold in the near future?

In our opinion, another test of the strength of the blue (or even red) support line.

From today’s point of view, we see that oil bears not only tested, but also managed to closed Wednesday’s session below both support lines. Is this a negative event? Yes. Does it justify reopening short positions? Unfortunately, not. Why?

First, thanks to yesterday’s drop, black gold declined to the green support zone, which managed to stop the sellers and trigger a sizable move to the upside in June.

Second, this area is also reinforced by the 61.8% Fibonacci retracement and the 200-day moving average, which serve as additional supports at the moment.

Third and the most important, crude oil slipped to the lower border of the green rising wedge seen on the monthly chart below.

Therefore, in our opinion, as long as there is no breakdown below these important supports, another sizable decline is doubtful and reversal from here should not surprise us in the coming days.

Nevertheless, if oil bears manage to take the commodity lower (an we see confirmed breakdowns), we’ll re-open short positions (very probably bigger positions than usual). Until this time, waiting at the sidelines for a confirmation or invalidation of the above is justified from the risk/reward perspective.

Trading position (short-term; our opinion): No positions are justified from the risk/reward perspective. 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, Gold & Silver Fund Manager

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