Trading position (short-term; our opinion): Short positions with a stop-loss order at $45.32 and profit-take order at $35.72 are justified from the risk/reward perspective.
On Friday, crude oil lost 1.68% as the combination of disappointing Chinese data and the Baker Hughes report weighed on investors’ sentiment. As a result, light crude hit a fresh multi-month low, slipping under a key technical level of $40 for the first time since 2009. Where will the commodity head next?
On Friday, official data showed that the Caixin China Manufacturing PMI flash declined to 47.1, missing analysts’ expectations for a 47.7 reading and hitting a 77-month low. Additionally, the Nikkei Japan PMI Manufacturing survey dropped to 51.9 in August (also missing forecasts), which together fuelled concerns over demand prospects and pushed the commodity lower. On top of that, the Baker Hughes report showed another increase in U.S. rig count, which resulted in a decline that took light crude below the psychologically important barrier of $40. Is it enough to trigger further deterioration in the coming days? (charts courtesy of http://stockcharts.com).
In our previous Oil Trading Alert, we wrote the following:
(…) the commodity is still trading under the March low and well below the green and blue resistance lines, which suggests that another downswing can’t be ruled out.
From today’s point of view, we see that oil bears pushed the commodity lower (as we had expected) once again. With this downswing, light crude slipped below the key technical level of $40 for the first time since 2009, which is a bearish signal. Although light crude rebounded slightly and closed the day above this psychologically important barrier, the commodity confirmed the breakdown under the March low (there were several consecutive daily closes under this level), which doesn’t bode well for crude oil.
Nevertheless, in our opinion, the most important bearish factor we can see on the weekly chart. Let’s take a look.
Quoting our last alert:
(…) please keep in mind that if the commodity closes this week below the March low or declines below the key support line on sizable volume, we’ll consider re-entering short positions. Until this time, in our opinion, the risk is too high.
Looking at the chart from this perspective, we clearly see that crude oil closed the previous week under the March low, which suggests further declines to around $37-$37.65 (the upper green zone based on the Feb 17 and Feb 23 2009 lows) or even to $35.13-$35.52, where the Dec 2008 and Jan 2009 lows are.
Summing up, crude oil closed the previous week under the March low and slipped below the key technical level of $40 for the first time since 2009. Moreover, it's not reacting positively to USD's decline (in fact, it's declining as well). Thanks to these circumstances, in our opinion, the overall situation is bearish enough to justify opening short positions from the risk/reward perspective.
Very short-term outlook: bearish
Short-term outlook: bearish
MT outlook: bearish
LT outlook: mixed with bearish bias
Trading position (short-term; our opinion): Short positions with a stop-loss order at $45.32 and profit-take order at $35.72 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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