Trading position (short-term; our opinion): No positions are justified from the risk/reward perspective. In other words, we believe that taking profits off the table is currently justified.
On Monday, crude oil gained 2.47% as the combination of a weaker greenback and a Midwest refinery shutdown supported the price. Thanks to these circumstances, light crude bounced off a fresh multi-month low and closed the day well above $44, invalidating earlier breakdown below support/resistance levels. Does it mean that investors’ sentiment has improved and we’ll see higher prices?
Although crude oil hit a fresh multi-month low after the market’s open, a sharp rally in U.S. gasoline and diesel (caused by an unplanned outage at BP's crude distillation unit at its Whiting, Ind., refinery, which was shut by a malfunction over the weekend) triggered a rebound in light crude. Additionally, the U.S. dollar lost ground vs. major rivals, supporting crude oil and other commodities (as is well known, a weaker greenback makes light crude cheaper to users of other currencies). In this environment, crude oil climbed to an intraday high of $45.01, invalidating earlier breakdown under support levels. Is it time for reversal? Let’s take a look at the charts to find out (charts courtesy of http://stockcharts.com).
On the weekly chart, we see that after many weeks of declines crude oil reversed and gained almost 2.5%. With yesterday’s upswing light crude invalidated the breakdown under the green support line based on the weekly closing prices, which in combination with a buy signal generated by the Stochastic Oscillator suggests that higher values of the commodity may be just around the corner. Of course, the week is not over yet and the above version of Stochastic is based on weekly closing prices, so the buy signal is not very strong, but still, it is a bullish sign.
Are there any other technical factors that could encourage oil bulls to act? Let’s take a closer look at the daily chart and find out.
In our previous commentary, we wrote the following:
(…) Crude oil is about to reach its strong support, so we can expect to see a corrective upswing relatively soon (…) Precisely, crude oil moved below the first of the horizontal support levels, but is about to reach the combination of the second one (Jan 2015 low) and the declining red support line, which could trigger a bigger corrective upswing.
From today’s point of view, we see that the commodity reversed and rebounded after a drop to the above-mentioned support area. Thanks to this upswing, light crude invalidated earlier breakdown under the first of the horizontal lines and the green support/resistance line based on the previous lows. This is a positive signal, which suggests that we could see further improvement – especially when we factor in the size of volume that accompanied yesterday’s move (it was much bigger compared to what we saw in previous days). Additionally, the RSI and Stochastic Oscillator generated buy signals, suggesting that reversal may be just around the corner.
If this is the case and the commodity increases from here, the initial upside target would be around $45.52, where the upper line of the blue declining trend channel is. However, if this resistance is broken (and given the significance of the support levels that are being currently reached it seems quite likely that it will be broken), the next upside target would be around $47.05-$47.71, where the Apr low and the 23.6% Fibonacci retracement (based on the entire Jun-Aug decline) are.
Summing up, crude oil hit a fresh multi-month low, but the proximity to the solid support zone (created by the Jan 2015 low and the declining red support line) triggered a rebound and there is a good possibility that a bigger rally will be seen shortly (even though crude oil is declining once again today). Although Monday’s upswing is much smaller than previous upward moves (which means that the downtrend is still in place), an invalidation of the breakdown below important support levels in combination with buy signals generated by the indicators and sizable volume that accompanied yesterday’s move increases the probability of a bigger corrective upswing. Therefore, the risk of remaining on the short side of the market seems too big at this time.
Consequently, we think that it’s now (crude oil is trading at $43.28 at the moment of writing these words; just several cents above our previous profit-take level) justified to close the current short positions and take the massive profits off the table (we entered the short position on May 8 when crude oil was trading at about $59).
The situation is not bullish enough to justify opening long positions yet (especially in light of today’s decline), but it may soon be (or we may see another shorting opportunity shortly). We will continue to monitor the market and report to you accordingly.
Very short-term outlook: mixed
Short-term outlook: mixed
MT outlook: mixed with bearish bias
LT outlook: mixed with bearish bias
Trading position (short-term; our opinion): No positions 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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