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 crude oil moved sharply higher after the market’s open (supported by a huge wildfire in Canada, which disrupted oil sands production), the commodity reversed in the following hours, giving away most of the earlier gains, As a result, light crude invalidated a small breakout above the key resistance zone once again. What does it mean for the commodity?

Yesterday, crude oil increased sharply after the market’s open on news that a huge wildfire near oil city Fort McMurray in Canada threatened some oil pipelines in the region. As a result, there were closed and output at several facilities has been disrupted, which pushed the price of the commodity above $46 once again. Despite this improvement, light crude reversed in the following hours, giving away most of the earlier gains, which resulted in another invalidation of a small breakout above the key resistance zone. How can this fact affect the picture of crude oil in the next week? Let’s examine charts and find out (charts courtesy of http://stockcharts.com).

In yesterday’s summary, we wrote the following:

(…) 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.

Looking at the daily chart, we see that oil bulls pushed crude oil higher as we had expected. With this upswing, light crude climbed to an intraday high of $46.07 and approached the May 2 peak. Despite this improvement, they didn’t manage to push the commodity higher, which resulted in a sharp pullback. As a result, crude oil slipped under the black resistance line and the red resistance zone, invalidating earlier breakout once again. In our opinion, this is an additional negative signal, which suggests further deterioration in the coming week – especially when we factor in sell signals generated by the indicators, which continue to support oil bears and lower prices. If this is the case, and light crude moves lower from current levels – we’ll see a drop to the first support area and the green support line (around $42.68) in near future.

Having said the above, let’s check whether yesterday’s increase change anything in the long- and medium-term picture or not. Let’s examine charts and find out.

From this perspective, we see that although crude oil moved little higher yesterday, this upswing didn’t change anything as black gold is 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 – especially if light crude closes this week under the black line.

What can we infer from the monthly chart? Let’s find out.

Looking at the monthly chart, we see that the commodity remains under the 23.6% Fibonacci retracement and the red resistance zone, which means that further deterioration is just around the corner.

Summing up, although crude oil moved sharply higher after the market’s open, oil bulls didn’t manage to hold gained levels, which resulted in equally sharp decline that took the commodity under the long-term black resistance line (marked on the weekly chart), the black resistance line and red resistance zone (seen on the daily chart). In this way, light crude invalidated earlier breakouts once again, which is a negative signal that suggests further deterioration to at least $42.68 in near future.

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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