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

The crude oil moved higher at the start of the week, which was not surprising given the bullish weekly reversal that we had seen previously. Yet, one needs to keep in mind that the candlestick patterns have limited time in which they work and the impact of what we saw in the crude oil market could be short-lived. Since we have already seen a daily rally, is the bullish signal from the previous week’s reversal no longer present? Or was it strengthened by yesterday’s daily reversal?

In short, the very short-term situation is still rather blurry, especially that the monetary authorities are meeting this week and the markets may not be willing to move in any way in a decisive manner before tensions regarding the meetings subside.

There were no changes on the long-term chart for crude oil, but we’ll feature in anyway as it provides a good context to the short-term developments.

In short, our previous comments on the above chart remain up-to-date:

Crude oil’s May reversal is not a 100% classic book example as crude oil have erased some of the late-month declines, but it’s clear enough for the implications to be bearish. This is especially the case since the price of black gold reversed after reaching two important, long-term resistance levels: 50% Fibonacci retracement based on the 2011 – 2016 decline and (even more importantly) the 38.2% Fibonacci retracement based on the 2008 – 2016 decline.

Therefore, crude oil is likely to move lower not only in terms of days, but in terms of weeks, and perhaps even months.

The above implications are already playing out – despite this week’s comeback, crude oil is still over $1 below the May close and the odds are that it’s going to be much lower before June is over.

The CCI indicator in the lower part of the above chart shows why the implications could extend well beyond this month. Earlier this year, the indicator moved above 200 and now it’s moving lower and it’s about to break below the 100 level.

There were only two similar cases to the current one in the past decade. The first was in mid-2008 and the second one was in mid-2011. The former was followed by many tens of dollars of declines and the latter was followed by a decline of “only” over $35. The May top was formed at about $72, and it’s now at about $66, which means that it’s not even close to being as big as any of the previous declines that were similar with regard to CCI.

This means that crude oil is likely to fall further before the decline is over and the time factor adds credibility to this prediction. After all, both above-mentioned declines started in the middle of the year and that’s approximately where we are right now.

Having said that, let’s take a look at the weekly price changes.

In our yesterday’s alert we emphasized that the true implications of the reversal were quite weak as it was not accompanied by huge volume. It meant that we might get a few days of higher prices, but it was not very likely – definitely nothing worth betting on. It seemed more likely that we’d get some kind of bearish signs shortly, for instance in the form of a rally on weak volume that could make us re-enter the short positions that we had profitably closed several days ago.

This remains to be the case today. Crude oil moved insignificantly higher, which is in precise tune with our expectations. Yet, it we wouldn’t bet the farm on a much bigger rally. In fact, we wouldn’t bet anything.

Yesterday’s bullish reversal seems encouraging, especially that it followed buy signals from the CCI and Stochastic indicators, but only until one looks at the volume. It was low, which suggests that it was not a true bullish victory of bulls, but rather a daily pause. This perfectly fits the current lack of decisive action that is likely caused by the uncertainty regarding this week’s monetary meetings.

Let’s keep in mind that the upside potential is very limited. Crude oil just broke below the rising green support/resistance line, so it could now simply move to it and verify the breakdown. The upside is therefore at about $66.80 – a bit less than a dollar above the current crude oil price ($65.96).

Summing up, the immediate-term outlook is unclear, and while we may see additional strength this week, a big decline is still likely to follow. Therefore, it seems best to stay out of the market for now, but at the same time be prepared to take on a new (probably short) position shortly.

Trading position (short-term; our opinion): No positions 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 Fund Manager

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