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 Monday, crude oil lost 5.53% as sharp declines on China's stock market weighed on investors’ sentiment. In this environment, light crude dropped to a fresh multi-month low, breaking below its key support. What’s next?
In previous weeks, Chinese equities have been under heavy selling pressure as a fear over China’s slowing economy and worries that Beijing may allow the Yuan to continue to depreciate have weighed on investors’ sentiment. Moreover, recent disappointing economic data fuelled that fears, which resulted in a sharp decline on China's stock market. Yesterday, the Shanghai Composite lost almost 9% (the biggest one-day drop since February 2007), which raised concerns that the plunge could spread to other parts of the Chinese economy, triggering fears that Chinese demand for oil will decline (China imports more than 5.65 million barrels of crude oil per day, which makes the country the world's second-largest importer of oil beyond the U.S.). Thanks to these circumstances, light crude hit a fresh multi-month low of $37.75, but will we see further deterioration in the coming days? (charts courtesy of http://stockcharts.com).
In our yesterday’s Oil Trading Alert, we wrote the following:
(…) light crude slipped below the key technical level of $40 for the first time since 2009, which is a bearish signal. (…) 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.
The first thing that catches the eye on the daily chart is a breakdown under the key support – the red declining line, which is a strong bearish signal. Secondly, with yesterday’s move the commodity also dropped below the blue support line (the lower border of the declining wedge), which is an additional negative sign. Thirdly, Monday’s decline materialized on sizable volume, which confirms oil bears’ strength.
Nevertheless, we should keep in mind that, yesterday’s downswing approached crude oil to the upper green support zone marked on the weekly chart below.
Taking this fact into account, we think that corrective upswing from here should not surprise. However, even if we see such price action, we believe that as long as the commodity remains under the previously-broken key technical level of $40, further improvement is not likely to be seen (especially when we factor in the fact that light crude is trading well below the March low of $42.41).
Summing up, the most important event of yesterday’s session was the breakdown under the key support – the red declining support line, which materialize on sizable volume (a bearish sign). Moreover, the commodity didn’t react positively to USD's decline once again, which suggests that higher values of the U.S. currency will push light crude even lower in the coming days (even if we see a short-lived rebound).
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 $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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