Trading position (short-term; our opinion): No positions are justified from the risk/reward perspective.

On Thursday, crude oil moved slightly lower as the combination of the Genscape, Inc. report and news from Iraqi state-run South Oil Company affected negatively investors’ sentiment. In this environment, light crude moved away from the upper border of the declining trend channel, but then reversed and increased above this resistance line. Will it encourage oil bulls to act in the coming days?

Although TransCanada Corp. halted a 590,000 barrel per day transfer last Saturday through the Keystone crude pipeline, yesterday’s Genscape, Inc. report showed that inventories at Cushing rose by 255,804, which pushed the price of the commodity lower. On top of that, the Iraqi state-run South Oil Company reported that exports from the nation's Southern Iraq port rose to 3.494 million bpd for the first week of April, which affected negatively price as well. Thanks to these circumstances, light crude moved away from the upper border of the declining trend channel, but then reversed and increased above this resistance line. Will it encourage oil bulls to act in the coming days? Let’s examine charts and find out (charts courtesy of http://stockcharts.com).

Quoting our previous Oil Trading Alert:

(…) yesterday’s increase materialized on significant volume (compared to earlier declines), which confirms oil bulls’ strength. On top of that, the CCI and Stochastic Oscillator generated buy signals, which suggests that further improvement is just around the corner. Nevertheless, before we see such price action, currency bears may push the commodity little lower as the upper border of the trend channel will likely encourage some day traders to take profits off the table (…) if light crude erases some of recent gains, the initial downside target would be around $37.27, where the 23.6% Fibonacci retracement is.

From today’s point of view, we see that oil bears pushed the commodity lower after the market’s open as we had expected. With this downswing, light crude not only slipped to our first downside target, but also dropped slightly below 38.2% Fibonacci retracement (based on recent upswing). This shallow pullback encouraged oil bulls to act, which resulted in a rebound and a climb above the upper border of the blue declining trend channel. As a result, light crude climbed to the 38.2% Fibonacci retracement based on entire Mar-Apr decline, which resulted in a reversal and crude oil gave up some gains. Despite this fact, the commodity closed the day above the blue line, which suggests a verification of earlier breakout. If this is the case, light crude will extend gains from here and the initial upside target would be around $38.86 (the 50% Fibonacci retracement based on entire Mar-Apr decline).

Having said the above, let’s examine the weekly chart and find out whether yesterday’s price action had impact on the medium-term picture or not.

Looking at the weekly chart, we see that although crude oil moved little lower yesterday, the commodity remains above the lower border of the blue consolidation and the red declining line, which means that invalidation of earlier breakdowns and its positive impact on light crude is still in effect, suggesting further improvement. However, such price action will be more likely and reliable if the commodity increases above the red dashed declining line (currently around $38.40). Until this time pullback can’t be ruled out.

Summing up, crude oil climbed to the 38.2% Fibonacci retracement (based on entire Mar-Apr decline), which triggered a small pullback and a comeback to the previously-broken upper border of the blue declining trend channel, which looks like a verification of earlier breakout. If this is the case, light crude will extend gains from here and the initial upside target would be around $38.86 (the 50% Fibonacci retracement).

Very short-term outlook: mixed
Short-term outlook: mixed with bullish bias
MT outlook: mixed
LT outlook: mixed

Trading position (short-term; our opinion): No positions are justified from the risk/reward perspective. We will keep you – our subscribers – informed should anything change.

As a reminder – “initial target price” means exactly that – an “initial” one, it’s not a price level at which we suggest closing positions. If this becomes the case (like it did in the previous trade) we will refer to these levels as levels of exit orders (exactly as we’ve done previously). Stop-loss levels, however, are naturally not “initial”, but something that, in our opinion, might be entered as an order.

Since it is impossible to synchronize target prices and stop-loss levels for all the ETFs and ETNs with the main market that we provide this level for (crude oil), the stop-loss level and target price for popular ETN and ETF (among other: USO, DWTI, UWTI) are provided as supplementary, and not as “final”. This means that if a stop-loss or a target level is reached for any of the “additional instruments” (DWTI for instance), but not for the “main instrument” (crude oil in this case), we will view positions in both crude oil and DWTI as still open and the stop-loss for DWTI would have to be moved lower. On the other hand, if crude oil moves to a stop-loss level but DWTI doesn’t, then we will view both positions (in crude oil and DWTI) as closed. In other words, since it’s not possible to be 100% certain that each related instrument moves to a given level when the underlying instrument does, we can’t provide levels that would be binding. The levels that we do provide are our best estimate of the levels that will correspond to the levels in the underlying assets, but it will be the underlying assets that one will need to focus on regarding the sings pointing to closing a given position or keeping it open. We might adjust the levels in the “additional instruments” without adjusting the levels in the “main instruments”, which will simply mean that we have improved our estimation of these levels, not that we changed our outlook on the markets.

Thank you.

Nadia Simmons
Forex & Oil Trading Strategist
Przemyslaw Radomski, CFA
Founder, Editor-in-chief

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