Trading position (short-term; our opinion): Long position in crude oil with target price at $54.48 and stop-loss at $49.87 is justified from the risk/reward perspective.
The last sessions have passed under the dictation of the sellers. Do oil bulls have reason to worry? Are technical factors still on their side?
Let’s take a closer look at the charts below (charts courtesy of http://stockcharts.com).
From today’s point of view, we see that crude oil extended its decline under the previously-broken 200-week moving average during yesterday’s session. However, despite this move, the price of light crude remains above the long-term green line (it serves now as the nearest support) and the buy signals generated by the RSI, the CCI and the Stochastic Oscillator continue to support higher values of the commodity.
Additionally, when we take a closer look at the chart, we can notice two potential pro-bullish formations on the horizon. To see them more clearly, let's analyze the chart below.
From this perspective, we see that the 50-day moving average triggered a pullback on Friday, which encouraged the sellers to act on the following session. Despite yesterday’s drop, light crude remains above $49.71, which marks the bottom line of the red consolidation seen on the daily chart.
Therefore, in our opinion, as long as there is no breakdown below this price another attempt to move higher is very likely – especially if we consider this consolidation as a small flag. Why? Because such a short-term consolidation phase often occurs during strong trends (we could observe an example of a similar formation during a strong downward move in mid-November). If this is the case, and the bulls take the next move to the north, we’ll see not only a test of the recent high, but also the red declining resistance line.
If the commodity breaks above them, the next upside target for the buyers will be around $55.45, where the size of the upward move will correspond to the height of the consolidation.
Nevertheless, before we summarize todays alert, we would like to draw your attention to the above-mentioned red declining resistance line based on the December and Friday peaks.
Why? Because from today’s point of view, it seems that the recent drops could be caused by the creation of the right arm of a potential reverse head and shoulders formation (yes, only potential, because until there is no breakout above the neck line of the pattern it can be considered only in this way).
If this is the case, we should also consider a short-lived pro-bearish scenario. What do we mean by that? If the situation develops in tune with this assumption, we’ll likely see a test of the late-November lows around $49.50 (which, in our opinion, may be the left arm of the formation) or even the lower red support line (parallel to the neck line and based on the above-mentioned potential left shoulder) in the following days.
At the moment of writing this alert, the aforementioned red line intersects the previously-broken upper border of the blue declining trend channel, which serves as an additional support in this area (around $48.10). However, taking into account the presence of the long-term green support line marked on the weekly chart, we think that the current correction will be stopped in this area (around $ 48.50).
Finishing today’s commentary, please keep in mind that this is only a potential scenario, the activation of which will become more possible only when the bulls show a visible weakness and fail to break through the abovementioned resistances.
Summing up, crude oil moved lower during Monday’s session, but despite this drop, the price of black gold remains inside the red consolidation, which means that as long as there is no breakdown below it higher values of the commodity are very likely and long positions continue to be justified from the risk/reward perspective.
Trading position (short-term; our opinion): Long position in crude oil with target price at $54.48 and stop-loss at $47.96 is 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
Editor-in-chief, Gold & Silver Fund Manager
