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 lost 2.31% as the combination of a stronger greenback and another build in crude oil supplies weighed on the price. Thanks to these circumstances, light crude moved away from the key resistance lines and closed the day under $47. What’s next?
Yesterday’s ADP report showed that U.S. non-farm private employment rose by 182,000 last month, beating expectations for an increase of 180,000. Additionally, the U.S. Commerce Department said that the trade deficit declined to $40.81 billion in September also beating analysts’ forecasts. On top of that the Institute of Supply Management showed that its non-manufacturing PMI rose to 59.1 last month well above forecasts of 56.5. Thanks to these bullish numbers, the U.S. dollar extended gains, making crude oil less attractive for buyers holding other currencies. Additionally, the U.S. Energy Information Administration reported that crude oil inventories increased by 2.847 million barrels in the week ended October 30, which pushed the commodity lower. As a result, light crude moved away from the key resistance lines and closed the day under $47. What’s next? Let’s find out what can we infer form charts (charts courtesy of http://stockcharts.com).
Yesterday, we wrote the following:
(…) the red declining resistance line was strong enough to stop further improvement in the previous month, which resulted in a drop to the blue support area. Taking this fact into account and combining it with the long-term picture, we believe that reversal is just around the corner.
Looking at the charts, we see that the combination of the green dashed and red declining resistance lines stopped oil bulls (as we had expected) and triggered a pullback. With this downswing, light crude invalidated small breakouts above these lines (a bearish signal), which suggests further deterioration.
How low could the commodity go? In our opinion, the initial downside target would be the blue support line (currently around $43.81). If this key support is broken, we’ll likely see an acceleration of declines and a drop to (at least) $40.57-$40.86, where the next support area (created by the 76.4% and 78.6% Fibonacci retracement levels) is. Nevertheless, the bearish scenario will be more likely if we see another weekly close below the above-mentioned key resistance lines.
Summing up, the key long- and medium-term resistance lines triggered a correction of the previous upward move, which suggests that further deterioration in the coming day(s) is more likely than not and 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 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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