Trading position (short-term; our opinion): Short positions (with a stop-loss order at $39.12) are justified from the risk/reward perspective.
On Thursday, crude oil lost 2.35% as China sell-off fuelled worries over light crude demand. Thanks to these circumstances, the commodity hit a fresh Jan low and broke below the 2009 low. What does it mean for oil bulls?
Yesterday, Shanghai Composite Index plummeted 7% within a half-hour of the start of trading, which affected negatively investors’ sentiment and fuelled concerns over light crude demand (as a reminder, China consumes around 10.5 million barrels per day). As a result, light crude declined sharply, hitting a fresh multi-year low of $32.10. With this downswing, the commodity also broke below the 2009 low. What does it mean for oil bulls? Let’s examine charts and find out (charts courtesy of http://stockcharts.com).
Yesterday, we wrote:
(…) light crude broke below the Dec low and slipped below our yesterday’s downside target. (…) this is a bearish signal, which suggests further deterioration and a drop to around $32, where the lower border of the red declining trend channel is.
Looking at the daily chart, we see that the situation developed in line with the above scenario and crude oil declined sharply, reaching our downside target. As you see, the lower border of the red declining trend channel triggered a rebound in the following hours, but the commodity closed another day under the Dec low. Additionally, sell signal generated by the Stochastic Oscillator remains in place, which in combination with yesterday’s huge volume suggests another attempt to move lower in the coming day(s).
What impact did this move have on the long-term picture? Let’s check.
The first thing that caches the eye on the above chart is a breakdown under the key support zone created by the green line based on previous lows (the neck line of the head and shoulders formation) and the 2009 low. This is a bearish signal (which would be even more bearish if the commodity closes this week below this area), which suggests that the way to lower prices is open. If this is the case, and light crude extends losses, the initial downside target would be the psychological barrier of $30.
Summing up, crude oil extended losses and broke below the 2009 low and the neck line of the head and shoulders formation, which suggests further deterioration in the coming week(s). Therefore, short positions (which are already profitable as we opened them when crude oil was trading around $38) are justified from the risk/reward perspective.
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 $39.12) 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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