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 Wednesday, crude oil gained 4.39% after bigger-than-expected drop in crude oil inventories. As a result, light crude broke above the 50-day moving average and closed the day above $47, but whether this action is as positive as it seems at first glance?
Although the U.S. Energy Information Administration reported that gasoline inventories increased by 2.8 million barrels and distillate inventories rose by 3.1 million barrels in the week ending on September 11, the report also showed that crude oil stocks fell by 2.1 million barrels from the previous week, beating analysts’ forecast. Thanks to this bigger-than-expected drop, light crude surged over 4% and closed the day above the 50-day moving average. Will we see further rally? (charts courtesy of http://stockcharts.com).
The first thing that catches the eye on the daily chart is a breakout above the 50-day moving average. Without a doubt this is a positive signal, but is it as bullish as it seems at first glance? Not really, because when we take a closer look at the above chart, we see that yesterday’s rally took the commodity to the 38.2% Fibonacci retracement, which serves as solid resistance. Why? As you see, although there were several attempts to move higher, they all failed and we didn’t see a breakout (not to mention the daily closure) above this resistance level since Aug 31.
Additionally, the size of the volume that accompanied yesterday’s increase wasn’t huge (compared to what we saw at the turn of Aug and Sept), which raises doubts about oil bulls’ strength.
On top of that, we can notice similar action in the behavior of daily indicators at the beginning of declines in June and now. As you see on the above chart, after the CCI and Stochastic Oscillator generated sell signals in June, there was a small increase in the values of indicators, which corresponded to an upward move in crude oil. Despite those moves, both indicators reversed and declined sharply, which encouraged oil bears to act and triggered a sizable downward move in the following weeks.
All the above shows that although crude oil extended gains and broke above the 50-day moving average, the overall situation hasn’t changed much. In our opinion, the best proof of this assumption will be a closer look at the long-term chart below.
From this perspective we see that although crude oil moved higher in recent days, the commodity remains under the green dashed line, which means that the probability of the bearish head and shoulders formation (and a significant profit potential on the current trade) is still very high.
Summing up, although crude oil broke above the 50-day moving average, the size of volume doesn’t confirm oil bulls’ strength, which means that the outlook for crude oil remains bearish 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
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