Trading position (short-term; our opinion): Long positions (with a stop-loss order at $42.95 and initial upside target at $50) are currently justified from the risk/reward perspective.

On Wednesday, crude oil gained 5.33% as a combination of another drop in crude oil inventories and unexpected OPEC deal supported the price of the commodity. In this environment, light crude bounced off important support lines and approached Sep highs. Will oil bulls manage to push crude oil higher in the coming week?

Although the U.S. Energy Information Administration said that gasoline inventories increased by 2.027 million barrels, yesterday’s report also showed that crude oil inventories dropped by 1.882 million barrels in the week ended September 23. Additionally, distillate inventories fell by 1.915 million barrels and supplies at Cushing, Oklahoma decreased by 631,000 barrels last week. Thanks to these bullish numbers, the price of the commodity bounced off sessions lows and came back above $45.

On top of that, the Organization of the Petroleum Exporting Countries agreed to limit its production to a range of 32.5-33.0 million barrels per day, which gave light crude an additional support. In this environment, the commodity extended gains and closed the day above $47, approaching Sep highs and the first resistance zone. Will oil bulls manage to push crude oil higher in the coming week? Let’s examine the charts below and find out (charts courtesy of http://stockcharts.com).

Yesterday, we wrote the following:

(…) crude oil slipped to the (…) support zone. What’s next? When we take a look at the daily chart, we see that there was almost identical situation on Friday. However, back then, the size of volume was bigger that yesterday, which suggests that oil bears may weaken. Additionally, Tuesday’s downswing stopped slightly above the black dashed line based on the Aug highs, the 50-day moving average and the black rising support line based on the Feb and Aug lows, which looks like a verification of earlier breakouts.

If this is the case, we’ll likely see another reversal and an increase similar to Monday’s move in the coming day(s). Consequently, the initial upside target would be the red resistance zone around $47.75-$48.46.

Looking at the daily chart, we see that the situation developed in tune with our yesterday’s assumptions and crude oil bounced off the key support lines once again. As a result, the commodity shot up and climbed above last week’s highs, approaching our initial upside target - the red resistance zone. What can we expect in the coming days? As you see on the daily chart, this area was strong enough to stop oil bulls at the beginning of the month and trigger a correction of earlier upward move. Taking only this fact into account, it seems that we may see similar price action in the coming day(s).

However, when we take a closer look at the above chart, we can notice several bullish factors. Firstly, the size of the volume that accompanied yesterday’s increase was huge (the biggest since the beginning of Dec 2015), which confirms oil bulls’ strength. Secondly, the Stochastic Oscillator generated a buy signal once again, supporting further improvement. Thirdly, crude oil climbed above the red dashed declining resistance line based on the Aug and Sep highs (this resistance was strong enough to keep light crude under $46 since last Thursday).

Taking all the above into account, we think that higher prices of crude oil are just around the corner – even if light crude gives up some of yesterday’s gains before another move to the upside. In this case, we’ll see a test of the red resistance zone and if it is broken, the next upside target would be the barrier of $50.

Are there any other factors that could encourage oil bulls to act in the coming days? Let’s focus on the relationship between crude oil and precious metals.

The first thing that catches the eye on the above chart is invalidation of the breakdown under the 50-week moving average, which is a positive signal that suggests further improvement (however, in our opinion, this event will be more bullish if we see a weekly closure above this level). Additionally, the Stochastic Oscillator generated a buy signal once again, suggesting higher values of the ratio in the coming week. On top of that, the size of volume (at least at the moment of writing these words) is significant, which confirms that oil bulls are getting stronger. Connecting the dots, we think that the ratio will extends gains in near future.

Having said the above, let’s check how this increase affected the very short-term picture.

From the daily perspective, we see that the ratio bounced off the green support zone and increased not only above the 50-day moving average (invalidating earlier breakdown), but also climbed above the red dashed declining line based on the May and Jun highs. As you see, several times in previous weeks this line (or even a proximity to it) stopped further improvement, triggering pullback. Therefore, a breakout above it is, in our opinion, a very positive signal, which should translate into higher values of the ratio in the coming days – especially when we factor in another buy signal generated bythe Stochastic Oscillator. If this is the case, we’ll also see higher prices of crude oil as a strong positive correlation between the ratio and light crude remains in place.

Finishing our today’s Oil Trading Alert, we would also like to draw your attention to the oil-to-silver ratio.

Looking at the weekly chart, we see that the ratio broke above the red declining resistance line based on the May and Aug highs, which is an additional positive factor that could encourage oil bulls to act in the coming days.

On top of that, the ratio increased above the 200-day moving average seen on the chart below.

From this perspective, we also see that the ratio approached the red resistance zone, however, taking into account buy signals generated by the daily indicators and a breakout on seen on the weekly chart, we think that we’ll see (at least) a test of Aug highs in the coming days. If this is the case, further improvement in the ratio will trigger another upswing in crude oil (a strong positive correlation between the ratio and light crude).

Summing up, crude oil bounced off key short-term support lines, which resulted in a sharp move to the upside. With this increase, light crude approached the first resistance zone, which could pause further rally. Nevertheless, buy signals generated by the indicators in combination with the size of volume that accompanied yesterday’s session and the current situation in the oil-to-gold and oil-to-silver ratios suggests that further improvement is just around the corner.

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

Trading position (short-term; our opinion): Long positions (which are already profitable) are currently 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.

Thank you.

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

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