Trading position (short-term; our opinion): Short positions (with a stop-loss order at $53.22 and initial price target at $46) are justified from the risk/reward perspective.

On Tuesday, crude oil lost 1.11% as another bunch of the Iraqi comments and higher value of the USD Index made crude oil less attractive for investors. In this environment, light crude declined under the barrier of $50 and closed the day below it, invalidating earlier breakout. Will this event encourage oil bears to act?

Let’s examine the charts below and find out (charts courtesy of http://stockcharts.com).

On the weekly chart, we see that the red resistance line and a sell signal generated by the Stohastic Oscillator continue to support oil bears. Additionally, the CCI dropped once again, approaching the level of 100, which means that another sell signal is just around the corner.

What can we infer from the very short-term chart? Let’s check.

Quoting our yesterday’s alert:

(...) What’s next? Although crude oil invalidated yesterday’s breakdown (which is a positive signal that suggests further improvement), we should keep in mind that sell signals generated by the daily indicators remain in play, supporting oil bears and lower prices of light crude. Additionally, the size of the volume that accompaned yesterday’s drop was bigger than what we saw on Friday during a small rebound, which suggests that oil bears are not as weak as it may looks at the first sight.

On top of that, the current situation in the oil-to-gold ratio still favors oil bears and further deterioration. (...) the Stochastic Oscillator generated a sell signal, giving oil bears an additional factor to act. (...) Therefore, another test of the barrier of $50 is more likely than not. If this important support is broken, the next downside taget would be around $49.15-$49.47, where the recent lows are.

Looking at the daily chart, we see that the situation developed in tune with the above scenario and crude not only tested the barrier of $50, but also slipped below it and closed the day under this important support. In ths way, the commodity invalidated earlier breakout above this technically important level, which doesn’t bode well for oil bulls. Additionally, sell signals generated by the indicators continue to support further declines, which suggests that we’ll see (at least) a re-test of our next downside target in the coming day.

Finishing today’s alert, we would like to add that if oil bears push the commodity under the recent lows, we’ll see a drop to around one of the following levels:

• $48.68 (38.2% Fibonacci retracement based on the Sep-Oct upward move)
• $47.32-$47.58 (a support area created by the 38.2% retarcement based on the Aug-Oct upward move, the 50% retracement based on the Sep-Oct upward move and the 50-day moving average)
• $46.50 (61.8% Fibonacci retracement based on the Sep-Oct upward move and the black rising support line based on the Aug and Sep lows)

Summing up, short positions continue to be justified from the risk/reward perspective as crude oil closed the day under the barrier of $50, invalidating earlier breakout above this technically important level. Additionally, sell signals generated by the indicators (daily and weekly) suggests further deterioration and (at least) a re-test of the first support area around $49.15-$49.47 in the coming day(s).

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

Trading position (short-term; our opinion): Short positions (with a stop-loss order at $53.22 and initial downside target at $46) 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.

Thank you.

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

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