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 Friday, crude oil lost 2.09% as the first build in domestic oil rigs in nearly three months in combination with bearish reports from the International Energy Agency weighed on the price of the commodity. In these circumstances, light crude dropped to the lowest level since Aug. 28 and approached the barrier of $40. Will we see a test of 2015 lows in the coming week?
On Friday, the International Energy Agency in its monthly report for October showed that global crude oil inventories have soared to nearly 3 billion barrels, amid record supply in Iraq, Russia and Saudi Arabia. This news, in combination with a disappointing Baker Hughes report (which showed that U.S. oil rigs increased by two for the week ending on Nov. 6) pushed the commodity to its lowest level since late-August. As a result, crude oil hit an intraday low of $40.22. Will we see a breakdown under the barrier of $40 in the coming days? Let’s examine charts and find out (charts courtesy of http://stockcharts.com).
Looking at the above chart, we see that the commodity extended losses and closed the previous week below the blue support zone and the blue support line, which is a negative signal that suggests further deterioration in the coming week – especially when we factor in a sell signal generated by the Stochastic Oscillator.
What impact did this move have on the daily chart? Let’s check.
A week ago, we wrote the following:
(…) we believe that a successful breakdown under the key support area will accelerate declines and we’ll see 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.
As you see on the daily chart, the situation developed in line with the above scenario and crude oil reached our next downside target. Taking into account, the proximity to the barrier of $40, we could see a rebound from here in the coming day(s). Nevertheless, we believe that as long as the commodity remains below $42.58-$43.21 all upswings would be nothing more than a verification of the breakdown under the blue zone.
Therefore, even if we see such increase, the current position of the indicators in combination with the medium-term picture suggests that lower values of the commodity are still ahead us. How low could light crude go in the coming weeks? Let’s take a closer look at the long-term chart and find out.
From this perspective, we see that the commodity declined sharply earlier this month and lost more than 12%, which suggests that oil bears are getting stronger and we’ll see (at least) a test of the green support line (the neck line of the head and shoulders formation – you can read more about it here) in the coming weeks (currently around $38.35).
Summing up, crude oil extended losses and dropped to the green support zone, which could trigger a rebound from here. Nevertheless, the current position of the indicators in combination with the long- and medium-term picture suggests that further deterioration in the coming weeks is more likely than not and short positions (which are already profitable as we opened them when crude oil was trading around $46.69) 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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