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

On Monday, crude oil lost 2.70% as ongoing concerns over a supply glut and a stronger greenback weighed on the price. As a result, light crude extended declines and tested its key support line. Will it withstand the selling pressure in the coming days?

Thursday’s EIA report showed that inventories are at record highs, fueling concerns over a supply glut. On the following day, Baker Hughes report added to these worries as the number of rigs drilling for oil in the U.S. fell by just 37 last week, which was the smallest weekly drop this year (as a reminder, in the preceding week he report showed a decline of 84 rigs). On top of that, yesterday, the U.S. dollar moved higher, making crude oil less attractive among investors for holders of other currencies. In this environment, the commodity extended losses and dropped to its key support line. Will it encourage oil bulls to act? (charts courtesy of http://stockcharts.com).

In our previous Oil Trading Alert, we wrote the following:

(…) The upper line of the blue triangle triggered a decline, which took the commodity to the lower black support line (based on the daily closing prices) (…) it seems that all (…) negative signals will encourage oil bears to act and light crude will move lower once again. Therefore, we think that a breakdown under the nearest support line will accelerate further deterioration and trigger a drop to the next downside target - the lower line of the triangle (currently at $49.71).

Looking at the daily chart, we see that the situation developed in line with the above-mentioned scenario and crude oil reached our downside target. Although the lower line of the triangle could trigger a small rebound from here (to the previously-broken lower black line), we think that all negative signals that appeared in the last days (disappointing fundamental reports, the evening star formation, sell signals generated by the CCI and Stochastic Oscillator, the fact that the commodity is still trading well below the previously-broken 61.8% Fibonacci retracement and the Dec lows, and the medium-term picture) will continue to weigh on the price, encouraging oil bears to act. If this is the case, and light crude slips under the lower border of the blue triangle, it would be a strong negative sign, which will trigger further deterioration and a test of the 2015 low of $43.58 in the coming days.

And speaking of the medium-term picture…

Yesterday, we wrote:

(…) Friday’s drop pushed the commodity under the resistance zone created by the 76.4% and 78.6% Fibonacci retracement levels. In this way, crude oil closed the week under these levels for the first time in Feb. (it was also the oil market’s first weekly loss in nearly a month). Additionally, when we take a closer look at the chart, we can see that the recent candlesticks formed a bearish engulfing pattern. Taking all the above into account, (…) another test of the support zone based on the Apr 2009 lows is likely.

From today’s point of view, we see that the above-mentioned factors pushed the commodity lower as we expected. Taking this fact into account, and combining it with the very short-term picture we still think that lower values of the commodity and another test of the support zone based on the Apr 2009 is still ahead us.

Summing up, crude oil moved lower and tested the strength of the lower border of the blue triangle. If it withstands the selling pressure, we’ll likely see a small rebound to the lower black line later in the day. Nevertheless, taking into account all the above-mentioned negative factors, it seems to us that oil bears will push the price to the support zone created by the Apr 2009 lows ($46.72-$48) once again.

Very short-term outlook: mixed with bearish bias
Short-term outlook: mixed
MT outlook: mixed
LT outlook: bullish

Trading position (short-term; our opinion): No positions are justified from the risk/reward perspective. We will keep you informed should anything change.

Thank you.

Nadia Simmons
Forex & Oil Trading Strategist
Przemyslaw Radomski, CFA
Founder, Editor-in-chief

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