Trading position (short-term; our opinion): No positions are justified from the risk/reward perspective.
Although crude oil moved lower after the market’s open, the combination of a weaker greenback and the Baker Hughes report supported the price, triggering a rebound. In these circumstances, light crude closed the day on its key support/resistance line. Where the commodity head next?
On Friday, official data showed that U.S. durable goods orders rose 4.0% in the previous month (beating expectations for a 0.6% gain), but core durable goods orders without transportation items fell 0.2% missing expectations for a 0.3% rise. These disappointing numbers pushed the USD Index below 97, making crude oil more attractive for buyers holding other currencies. On top of that, the Baker Hughes report showed that oil rigs in the U.S. fell by 31, leaving 703 rigs active. With this drop, the number of active rigs has fallen for a record 20 weeks in a row, which is the lowest level since 2010. Thanks to these circumstances, light crude bounced off the session’s low and closed the day on its key support/resistance line. Where the commodity head next? (charts courtesy of http://stockcharts.com).
Looking at the weekly chart, we see that the situation in the medium term hasn’t changed much as the commodity is still trading under the resistance zone created by the Dec 15 and Dec 22 highs. In our opinion, as long as there is n breakout above this area, further rally is not likely to be seen.
Having said that, let’s examine the daily chart.
Quoting our previous Oil Trading Alert:
(…) we should keep in minds that sell signals generated by the RSI and Stochastic Oscillator remain in place, supporting the bearish case. Additionally, the space for further rally seems limited as the resistance zone marked o the weekly chart is only $2 above the current price. These facts provide us with bearish implications and suggest that another pullback is just around the corner.
Looking at the daily chart, we see that oil bears pushed the commodity lower as we expected. With this downswing, crude oil slipped below the grey support/resistance line, but then rebounded and closed the day on this important line. This makes the very short-term picture a bit unclear. However, taking into account the proximity to the resistance zone marked on the weekly chart and sell signals generated by the CCI and RSI it seems to us that the next move will be to the downside.
If this is the case, and light crude declines, the initial downside target would be around $56.20, where the lower border of the rising wedge is. At this point, it is also worth nothing that slightly below this line (currently around $55.33) is also the lower line of the very short-term declining trend channel. If this area withstands the selling pressure, we’ll see another upswing and an attempt to move higher. However, if currency bears manage to push crude oil lower, we’ll see a test of the green support zone based on the Feb highs in the coming week.
Summing up, crude oil closed the day on its key support/resistance line, making the very short-term picture unclear. Nevertheless, the current position of the indicators and the limited space for further growth suggest that the probability of reversal in the coming week is high.
Very short-term outlook: mixed
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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