Trading position (short-term; our opinion): Short positions with a stop-loss order at $65.23 are justified from the risk/reward perspective.

Although crude oil moved lower after the market’s open, weakened by a historic nuclear deal between Iran and six global powers, the commodity reversed and rebounded sharply in the following hours. In this way, light crude gained 2.61% and climbed to the key resistance zone. One-day rally or something more?

Yesterday, after months of negotiations, Iran and the six powers reached a long-awaited nuclear deal, which would end sanctions on Tehran in exchange for curbs on the country's disputed nuclear program. Thanks to this news, crude oil moved sharply lower after the market’s open and hit an intraday low of $50.88. Despite this decline, the commodity reversed and rebounded sharply in the following hours as the greenback turned lower (after the Commerce Department disappointing data, which showed that retail sales dropped by 0.3% in the previous month, missing expectations for a 0.2% increase), making crude oil more attractive for buyers holding other currencies. What impact did this rally have on the very short-term picture? (charts courtesy of http://stockcharts.com).

Looking at the daily chart, we see that oil bears re-tested the recent lows after the market’s open, which resulted in a drop to the intraday low of $50.88. Despite this decline, the proximity to the barrier of $50 and the 61.8% Fibonacci retracement triggered a sharp rebound, which took the commodity to the red zone once again.

Did this one-day rally change anything in the very short-term picture? Not really, because, light crude remains under its key resistance area (there was also another daily close below it). When we take a closer look at the daily chart, we also notice that the recent rebound is much smaller than the previous upward moves, which we saw at the end of May and later in June (all marked with blue on the daily chart). Additionally, it didn’t even reach the 38.2% Fibonacci retracement (based on the May-Jul decline), which means that oil bulls may not be as strong as it seems at the first sight. All the above provides us with bearish implications, showing that the short-term downward trend remains in place and we are dealing only with a counter-trend bounce at the moment. Therefore, what we wrote yesterday is up-to-date:

(...) Taking (…) into account (…) sell signals generated by the indicators (we wrote more about them and similarities to what we saw in 2014 in our yesterday’s Oil Trading Alert), we believe that although the following decline doesn’t have to cut crude oil’s price in half once again, it does seem that the current decline has only begun.

(…) Nevertheless, in our opinion, another acceleration of declines will be more likely if light crude closes the day under the psychologically important barrier of $50 and the 61.8% Fibonacci retracement.

Summing up, although crude oil rebounded, it seems that yesterday’s upswing was just another verification of the breakdown under the zone created by the Feb highs. Additionally, not only the long-term, but also short-term downward trend remains in place, suggesting lower values of the commodity in the coming days, which means that short positions (which already profitable) in crude oil are justified from the risk/reward perspective.

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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