Trading position (short-term; our opinion): Short positions with a stop-loss order at $65.23 are justified from the risk/reward perspective.
On Wednesday, crude oil gained 0.81% as the combination of a bullish EIA report and a weaker U.S. dollar supported the price. Because of these circumstances, light crude climbed to its major resistance zone once again, but will it trigger another pullback in the coming days?
Yesterday, the U.S. Energy Information Administration reported that U.S. crude oil inventories declined by 6.8 million barrels in the week ended June 5, beating analysts' forecast for a crude-stock fall of 1.7 million barrels. Additionally, supplies at Cushing, Oklahoma dropped by 1.1 million barrels last week, also beating estimates for a drop of 0.8 million barrels. The report also showed that gasoline inventories declined by 2.9 million barrels, while distillate stockpiles increased by 0.9 million barrels.
These bullish numbers, in combination with a weaker U.S. dollar (which made crude oil more attractive for buyers holding other currencies) supported the price of the commodity and pushed it to an intraday high of $61.82. Despite this improvement, light crude gave some gains and closed the day under its major resistance zone. What does it mean for the commodity? (charts courtesy of http://stockcharts.com).
Yesterday, we wrote the following:
(…) crude oil reversed once again and broke above the upper border of the declining wedge, which means that we’ll likely see another test of the strength of the red resistance zone (created by the May highs and reinforced by a bearish gravestone candlestick pattern) later in the day.
Looking at the daily chart, we see that the situation developed in line with the above scenario and crude oil re-tested the red resistance zone. Despite this upswing, the commodity reversed and closed the day under the resistance area. Therefore, we believe that what we wrote in our previous Oil Trading Alert is up-to-date also today:
(…) we saw similar price action in the previous week. Back then, the above-mentioned resistance area was strong enough to stop further rally, which suggests that we might see another pullback from there in the coming day(s).
(…) As you see on the monthly chart, although crude oil reversed and moved higher once again, the key resistance zone (created by the long-term blue resistance line and the 200-month moving average) continues to keep gains in check. Therefore, we believe that as long as there is no successful breakout above this area further rally is not likely to be seen and anoher downswing is more likely than not.
Finishing today’s alert please note that if crude oil declines from here in the coming day(s), the initial downside target would be around $60, where the previously-broken upper line of the declining wedge is.
Summing up, although crude oil moved higher once again, the combination of the red resistance area and the key resistance zone (created by the 200-month moving average and the long-term blue line) withstood the buying pressure. As a result, light crude closed the day below these levels, which will likely encourage oil bears to act in the coming day(s) – similarly to what we saw in the previous weeks.
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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