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 2.31% as uncertainty around negotiations regarding the Iranian nuclear deal weighed on the price. In this environment, light crude broke under important short-term supports and closed the day below them. Is it enough to accelerate further declines?
Yesterday, White House press secretary’s commentary (that negotiations with Iran aimed at reaching a final agreement on a comprehensive nuclear deal will likely extend past Tuesday's deadline) waned oil investors’ sentiment, which translated to a lower price of the commodity. As a reminder, an easing of sanctions could enable Iran to release millions of barrels of crude reserves into a global market, which is already oversupplied. Thanks to these circumstances, light crude declined under important short-term supports and closed the day below them. What impact could it have on future moves? (charts courtesy of http://stockcharts.com).
The situation in the long term remains almost unchanged (crude oil moved little lower, but this decline is barely visible from this perspective), which means that what we wrote yesterday is up-to-date:
(...) this year’s rally is simply a sizable correction of the previous massive decline. Taking into account the fact that there was no major breakout and the trend remains down, it seems that the short-term outlook would deteriorate, as crude oil didn’t move above the long-term rising resistance line and the 200-month moving average.
How yesterday’s drop affect the very short-term picture? Let’s examine the daily chart and find out.
The first thing that catches the eye on the daily chart is a breakdown below the 50-day moving average and the short-term green support line. Additionally, the commodity closed yesterday’s session under these levels, which is a bearish development that suggests further deterioration and a test of the previous lows ($56.50-$57.60) or even the green support line (around $56). On top of that, sell signals generated by the indicators remain in place, supporting the bearish case.
Nevertheless, to have a more complete picture of the commodity we also take a closer look at the weekly chart. Will it give us more clues about future moves? Let’s check.
From this perspective, we see that crude oil is trading in a blue triangle around the green support zone (created by the Dec 15 and Dec 22 highs). With yesterday’s downswing light crude slipped to the lower border of the formation, which suggests that we could see a rebound from here in the coming day(s). Nevertheless, taking into account the current position of the weekly indicators (sell signals remain in place, supporting oil bears), we think that further deterioration is just around the corner. In our opinion, declines will accelerate if crude oil drops below the lower line of the triangle (currently around $58). In this case, the initial downside target for oil bears would be around $52.34-$54.24, where the green support zone (created by the Feb highs) is.
Summing up, crude oil closed the day below the 50-day moving average and the short-term support line, which makes the outlook even more bearish and suggests further deterioration in the coming day(s).
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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