Trading position (short-term; our opinion): Short positions with a stop-loss order at $65.23 are justified from the risk/reward perspective.
On Monday, crude oil lost 0.29% as the combination of a stronger greenback and OPEC expectations about crude oil prices weighed on investors’ sentiment. As a result, light crude closed another day under support/resistance lines. What does it mean for the commodity?
Yesterday, the USD Index extended gains and climbed above 95 as Friday's solid U.S. employment report continued to support the greenback, making crude oil less attractive for investors holding other currencies. Additionally, in its latest monthly report (which will be released later today), OPEC predicted that crude oil would remain under $100 until 2025, which weighed on investors’ sentiment and watered down the price as well. Will the commodity remain under $60 in the coming days? (charts courtesy of http://stockcharts.com).
From the long-term perspective, we see that the situation hasn’t changed much as crude oil is still trading under the 200-month moving average and the long-term blue line. This means that Thursday’s invalidation of the breakout above them and its negative impact on future moves is still in effect.
Can we infer something more from the daily chart? Let’s take a closer look and find out.
Looking at the above chart, we see that crude oil moved little lower, but the very short-term picture also hasn’t changed much as the commodity still remains under both grey resistance lines, while the bearish gravestone candlestick formation and sell signals generated by the indicators are still in play, supporting the bearish case.
Additionally, when we take a closer look at the chart, we can notice a potential head and shoulders formation. If this is the case, and oil bears take advantage of this opportunity, light crude will extend declines and test the strength of the green support zone (created by the Feb highs around $54-$54.24) in the coming days (please note that in this area the size of the downswing will correspond to the height of the formation).
Nevertheless, before we see such price action, crude oil could increase from here (even to around $60.70, where the lower grey line is), which would build the right shoulder of the formation. On top of that, oil bears will have to push the commodity below the green support line based on the May lows (the neck line of the formation is currently around $58.14) before we see an acceleration of the decline.
Finishing today’s alert, please keep in mind that if the green support zone is broken, the next targets would be around: $52.40 (the 50% Fibonacci retracement based on the entire Mar-May rally), $50 (the 61.8% retracement) or we might see a test of the Apr low of $47.
Summing up, the overall situation hasn’t changed much as crude oil is still trading under the solid resistance zone created by the 200-month moving average, the long-term blue line and both short-term grey resistance lines. Additionally, invalidation of the breakout above these levels and its negative impact on future moves is still in effect, which suggests further deterioration (especially when we factor in sell signals generated by the indicators and a potential head and shoulders formation).
Very short-term outlook: bearish
Short-term outlook: bearish
MT outlook: mixed with bearish bias
LT outlook: mixed with bearish bias
Trading position (short-term; our opinion): Short positions with a stop-loss order at $65.23 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
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