Trading position (short-term; our opinion): Short positions (with a stop-loss order at $52.52 and the initial downside target at $45.80) are justified from the risk/reward perspective.
On Monday, black gold moved little higher as Hurricane Irma weakened and eased worries over energy demand in U.S. As a result, light crude came back above the 50-day moving average, but did this increase manage to change the short-term picture of the commodity?
Non-USD Crude Oil’s Technical Picture
Let’s take a closer look at the charts below (charts courtesy of http://stockcharts.com).
In today’s Oil Trading Alert we’ll focus on the non-USD (WTIC:UDN ratio) chart of crude oil. As a reminder, UDN is the symbol for the PowerShares DB US Dollar Index Bearish Fund, which moves in the exact opposite direction as the USD Index. Since the USD Index is a weighted average of the dollar's exchange rates with world's most important currencies, the WTIC:UDN ratio displays the value of crude oil priced in "other currencies".
Looking at the long-term chart, we see that the overall situation hasn’t changed much in recent months as the ratio is still trading in the red consolidation. Nevertheless, the sell signals generated by the monthly indicators remain in play, suggesting that at least a test of the lower border of the formation is very likely – especially when we factor in the situation on the very short-term chart below.
As you see on the daily chart, the recent price action created a potential head and shoulders formation (the right shoulder is underway), which suggests that we’ll see at least a test of the neck line of the pattern (the red support line based on the July and August lows) in the coming week.
What could happen if this important support is broken? In our opinion, such a bearish development will open the way not only to the Jun lows, but also to around 1.82, where the size of the downward move will correspond to the height of the formation.
How could such drop affect crude oil priced in U.S. dollars? Without a doubt a confirmation of the above-mentioned head and shoulders formation will give oil bears a very important reason to act, which will likely accelerate declines and trigger not only a test of the 2017 lows, but also a drop to around $40.65, where the 50% Fibonacci retracement (based on the entire 2016-2017 upward move) is (this level is more clearly seen on the medium-term chart of crude oil below).
Finishing today’s alert, let’s take a look at the daily chart of crude oil.
From today’s point of view, we see that although light crude moved a bit higher yesterday, the commodity is still trading not only well below the major resistance levels (the long-term purple declining resistance line based on the February and April highs and the 50-week moving average seen on the weekly chart, the orange resistance line based on recent highs and the lower border of the purple rising trend channel marked on the daily chart), but also under the red resistance zone.
What's next for black gold?
Additionally, the sell signals generated by the CCI and the Stochastic Oscillator remain in place, supporting oil bears and further deterioration. Therefore, taking all the above into account, we believe that light crude will reverse from current levels and if black gold declines under the Friday low of $47.27, the next downside target will the August low (around $45.58) or even the 61.8% Fibonacci retracement and the late July low (around $45.26-$45.40).
Summing up, profitable short positions continue to be justified from the risk/reward perspective as crude oil remains under the previously-broken major resistances: the medium-term purple declining resistance line based on the February and April highs, the 50-week moving average and the lower border of the purple rising trend channel. Additionally, the potential head and shoulders formation seen on the non-usd chart of crude oil is underway, increasing the probability of another bigger move to the downside in the coming week(s).
Very short-term outlook: bearish
Short-term outlook: mixed with bearish bias
MT outlook: mixed
LT outlook: mixed
Trading position (short-term; our opinion): Short profitable positions (with a stop-loss order at $52.52 and the initial downside target at $45.80) are justified from the risk/reward perspective. We will keep you – our subscribers – informed should anything change.
As a reminder – “initial target price” means exactly that – an “initial” one, it’s not a price level at which we suggest closing positions. If this becomes the case (like it did in the previous trade) we will refer to these levels as levels of exit orders (exactly as we’ve done previously). Stop-loss levels, however, are naturally not “initial”, but something that, in our opinion, might be entered as an order.
Thank you.
Nadia Simmons
Forex & Oil Trading Strategist
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager
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