Trading position (short-term; our opinion): Short positions (with a stop-loss order at $48.56 and initial downside target at $35.24) are justified from the risk/reward perspective.
Although the EIA report showed a bigger-than-expected increase in crude oil inventories, U.S. production declined to the lowest level since Sept., 2014, which helped the commodity rebound from session’s lows. Thanks to these circumstances, light crude gained 0.39% and approached resistance zone. What’s next for the commodity?
Although the U.S. Energy Information Administration showed that distillates inventories dropped by 1.261 million barrels, the report also showed that crude oil stockpiles rose by 2.8 million barrels (much more-than-expected) and gasoline inventories surged by 0.536 million barrels in the week ending on April 29. Thanks to these bearish numbers, crude oil moved lower and hit an intraday low of $43.22. Despite this drop, yesterday’s data showed that U.S. production decreased by 113,000 barrels per day in the previous week, which was the strongest weekly decline since last July. As a result, U.S. output declined to the lowest level since Sept., 2014, which helped the commodity rebound from session’s lows. How high could light go in the coming day? Let’s examine charts and find out (charts courtesy of http://stockcharts.com).
On the weekly chart, we see that recent drops approached the commodity to the 50-week moving average, which triggered a small rebound yesterday. Despite this move, light crude s still trading under the long-term black resistance line, which means that invalidation of earlier small breakout and its negative impact on the price is still in play. Therefore, further deterioration in the coming week should not surprise us.
How did this move affect the very short-term chart?
Based only on yesterday’s price action, we see that the commodity approached the first green support area, which encouraged oil bulls to act. As a result, light crude bounced off session’s low, but closed the day under the black resistance line and the red resistance zone. Additionally, sell signals remain in place, supporting further deterioration.
Nevertheless, earlier today, crude oil’s futures moved sharply higher and increased to an intraday high of $45.61, which means that the commodity will also extend gains later in the day. If this is the case, and we see such price action, light crude could re-test the long-term black resistance line marked on the weekly chart or even recent highs (around $46.15-$46.76).
Summing up, based only on yesterday’s price action, we see that the overall situation hasn’t changed much. Nevertheless, crude oil’s futures moved sharply higher in pre-market trading, which suggests that the commodity will follow this increase and we’ll see a test of the long-term black resistance line (marked on the weekly chart) or even recent highs later in the day.
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 $48.56 and initial downside target at $35.24) are justified from the risk/reward perspective. We will keep you informed should anything change, or should we see a confirmation/invalidation of the above.
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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