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.

Although crude oil moved higher after the market’s open, a bearish EIA report weighed on investors’ sentiment and pushed the commodity lower. Despite this drop, light crude gained 1% and closed the day above the 50-day moving average once again. Does it mean that the worst is already behind oil bulls?

Yesterday, the U.S. Energy Information Administration reported that U.S. crude stockpiles increased by 4.0 million barrels for the week ending on Sept. 25, significantly beating expectations for a 0.5 million drop. In this way, yesterday’s increase halted a two week streak of declines, which raised worries over a supply glut (U.S. crude inventories remain near its highest level at this time of the year in at least 80 years). On top of that, the report also showed that gasoline inventories increased by 3.3 million barrels and are near the upper limit of the average range. In this environment, light crude gave up some gains, but closed the day above the 50-day moving average once again. What does it mean for the commodity? Let’s check (charts courtesy of http://stockcharts.com).

Looking at the daily chart, we see that crude oil moved higher once again and closed the day above the 50-day moving average. Additionally, the size of volume was bigger than day before, which suggests that we’ll see a test of the upper border of the declining trend channel (or even the recent highs and the 38.2% Fibonacci retracement) in the coming day(s).

Nevertheless, even if we see such price action, we believe that as long as light crude is trading under the 38.2% Fibonacci retracement and the medium-term upper black line (a potential right shoulder of the head and shoulders formation), the overall situation will remain bearish.

Summing up, crude oil closed the day above the 50-day moving average, which suggests a test of the upper border of the declining trend channel. However, as long as the medium-term resistance levels and sell signals generated by the indictors remain in place, lower values of the commodity are more likely than not. Therefore, short positions 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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