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

For many weeks we have been writing about the consolidation in crude oil and it seems that we finally saw its end. Crude oil broke above the resistance in a decisive way yesterday. Will black gold soar?

Let’s start with the short-term picture (charts courtesy of http://stockcharts.com).

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

(…) taking into account the fact that crude oil remains above the 38.2% Fibonacci retracement (based on Apr rally), it seems that oil bulls will try to push the commodity higher in the coming day. If this is the case, the initial upside target would be around $53.10-$53.23, where the recent highs are.

As you see on the daily chart, the situation developed in line with the above scenario and crude oil moved sharply higher. With this upswing, light crude climbed above the blue resistance line (which serves now as the nearest support), invalidating earlier breakdown. This is a bullish signal, which suggests further improvement and a test of the Feb highs later in the day.

We have indeed seen further strength – crude oil broke visibly above its previous 2015 high and such breakout is likely to lead to even further strength. We have seen an additional bullish sign on a short-term basis.

The breakout above the red resistance zone (created by the 76.4% and 78.6% Fibonacci retracement levels) is a very bullish event as the red resistance zone is also the neck level of the reverse head-and-shoulder pattern. The implication is that crude oil is likely to move much higher – according to the target marked with green rectangle.

Here’s what we wrote previously that could follow the breakout that we’ve just seen:

(…) There’s no significant resistance all the way up until the first of the classic Fibonacci retracement levels, which is much higher than the current crude oil price. Moreover, since the previous move lower was very sharp, we can expect a move back to be sharp as well. Consequently, paying extra attention to the crude oil market in the following days should be worth it.

There is something, however, that prevents us from going heavily long at this time.

The strong resistance created by the 200-month moving average (that stopped major declines 2 times: in 2001 and 2008/2009) and the very long-term rising resistance line based on 2001 and 2009 bottoms.

The combination of the above is just a few dollars higher, so the potential size of the additional upswing before we see a correction seems limited.

What happens after crude oil approaches the $60 level where the above-mentioned resistance levels coincide? We’ll either see a breakout right away (less likely) or a correction that will quite likely take oil back to the recently broken 2015 high. In case of the former we’ll have much lower risk associated with long positions. In case of the latter we’ll have both: lower risk (if the correction is accompanied by low volume) and greater size of the potential rally. That’s when we plan to enter full long positions.

Summing up, the outlook for the crude oil market improved significantly based on yesterday’s breakout, but it seems that waiting for a likely pullback before entering long positions is a good idea. Crude oil is likely to correct shortly and this small move lower should at the same time lower the risk and increase the potential profits, thus greatly improving the risk/reward ratio.

We’ll keep you – our subscribers – informed.

Very short-term outlook: bullish
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 at the moment, but 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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