Trading position (short-term; our opinion; levels for crude oil's continuous futures contract): Full (100% of the regular position size) speculative short positions in crude oil are justified from the risk to reward point of view stop loss $45.63 at and $30.22 as the initial target price.
As the currency market situation continues its substantial impact on the crude oil price, we'll start today's Oil Trading Alert with its analysis.
In the previous analyses, we've thoroughly dissected the USD Index's breakout and its invalidation. Cutting to the chase, we didn't quite believe in the invalidation's bearish implications, given the individual currency pairs' situation: the euro and the yen.
To be more specific, let's quote what we wrote about the USDX previously:
Namely, the USDX invalidated its breakout, which is clearly a bearish sign. Quite visibly, the USDX was above the declining resistance line, but it failed to hold these gains. In July, a failure to rally above resistance meant another big downturn, which translated into higher crude oil prices.
So, the question is, do the USDX and crude oil are after the same fate in the near future? Not necessarily.
The USD Index represents a weighted average of several currency exchange rates. The biggest weight (over 50%) is attributed to the euro exchange rate, and the second biggest weight is attributed to the yen exchange rate. Let's see how the situation looks like in both currencies.
The euro is after a breakdown and a verification thereof. It is a very bearish situation, and bullish one for the USD Index and. Because of that, at least in the short run, it is bearish for gold.
And what about the Japanese yen?
Turns out, as far as the implications are concerned, the situation is not that different. However, the direct reason for it is.
As you can see on the Japanese yen index chart above, for the past 1.5 years, it topped shortly and reversed its course whenever it tried to rally above the 95 levels.
The Japanese currency's implication can potentially invalidate the breakout once again. Therefore, history tends to rhyme, after all.
Given the suggestions that the individual currency exchange rates provide us with, should we really expect the USD Index's breakout invalidation to cause lower values? Not really. The individual currency exchange rates are more "basic", and their outlooks prevail the index chart that is essentially based on them.
In other words, the validity of the bearish implications of USDX's invalidation is suspicious.
The result is that the bearish outlook for crude oil didn't really change, even though we admit that it is not as bearish as it was before the USDX's breakout's invalidation.
And indeed, in today's pre-market trading, the USD Index is rallying. It is not a significant move in terms of nominal price changes, but it is much more profound in relation to the critical resistance that it is breaking. At the moment of writing, the USDX breakout seems quite apparent.
Of course, just as previously, the situation won't turn into a crystal-bullish one. That is unless we see a breakout verification in the form of a significant move above the resistance (it's not substantial so far), or three consecutive daily closes above it. Today would be the first such close (unless the breakout is invalidated on an intraday basis).
In a nutshell, according to today's USDX pre-market movement, the situation in it is more bullish and more bearish at the same time for the black gold price.
As far as crude oil's price moves are concerned, we see that it once again tested the upper border of the massive March price gap. Until it breaks above this level, the early-March lows, and the 61.8% Fibonacci retracement, a bullish outlook is simply not possible.
Taking into account our USD Index analysis from today, the above is unlikely to happen.
Obviously, crude oil moves lower after approaching the resistance mentioned above, which only confirms the bearish outlook.
To sum things up, in the upcoming weeks, the outlook for crude oil remains bearish, and the most recent upswing couldn't change that at all.
As always, we'll keep you - our subscribers - informed.
Trading position (short-term; our opinion; levels for crude oil's continuous futures contract): Full (100% of the regular position size) speculative short positions in crude oil are justified from the risk to reward point of view stop loss $45.63 at and $30.22 as the initial target price.
In the case of the futures contracts that are more distant than the current contract, we think that adding the premium (difference between the July and other contracts) to both: stop-loss and initial target prices is justified.
Thank you.
Nadia Simmons
Day Trading and Oil Trading Strategist
Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager
