Trading position (short-term; our opinion): Short positions with a stop-loss order at $54.12 and initial (!) target price at $35.72 are justified from the risk/reward perspective.
On Monday, crude oil lost 1.47% as mixed Chinese data weighed on investors ‘sentiment. As a result, light crude slipped to the key support area once again. Will we see another short-lived rebound?
Weekend’s Chinese data showed that fixed asset investment increased by 10.9% (just below expectations for a 11% rise), while industrial production gained 6.1% (missing forecasts for a 6.4% gain) and retail sales rose 10.8% (but only slightly above expectations for a 10.5% rise). These mixed numbers fueled concerns that third-quarter economic growth may dip below 7% for the first time since the financial crisis, which could translate to declines in Chinese demand for oil and enlarge a surplus of light crude. Thanks to these circumstances, light crude declined and approached important support area. What’s next for crude oil? (charts courtesy of http://stockcharts.com).
Looking at the above charts we see that crude oil moved lower and slipped to the key suport area created by the blue support zone (based on the Jan lows) and the previously-broken black support line (based on Jan and Mar weekly closing prices), which suggestes another rebound from here – similarly to what we saw in the previous weeks.
Nevertheless, we believe that as long as the commdity remains under the 50-day moving average, the 38.2% Fibonacci retracement and the upper black resistance line (marked on the weekly chart) further improvement is not likely to be seen. Additionally, oil bears are currently supported by sell signals generated by the CCI and Stochastic Oscillator, which suggests lower prices in the coming days (even if we see a short-lived rebound).
On top of that, we should keep in mind what we wrote about volume in our previous commentary:
(…) The volume was higher during Thursday’s rally than during Friday’s decline, but please note that this is not something that necessarily has bullish implications. The same thing happened in early June, mid-July and late July and in all these cases no strong rallies followed. Conversely, in the first case crude oil continued to trade sideways after which it declined and in the last 2 cases it declined shortly.
Taking all the above into account, we believe that further deterioration is just a matter of time and there is a significant profit potential on the current trade.
Summing up, the outlook for crude oil remains bearish (even if we see a short-lived rebound from here) and it will most likely remain the case at least as long as crude oil remains below the August high. Therefore, we believe that short positions (which are already profitable as we entered them when crude oil was at about $46.68) continue to be justified from the risk/reward point of view.
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 $54.12 (yes, that far as the medium-term outlook is unlikely to change as long as crude oil stays below the declining medium-term resistance line) and initial (!) target price 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
Gold & Silver Trading Alerts
Forex Trading Alerts
Oil Investment Updates
Oil Trading Alerts
