Trading position (short-term; our opinion): Short positions (with a stop-loss order at $56.45 and an initial downside target at $45.81) are justified from the risk/reward perspective.
On Thursday, crude oil gained 1.45% after news that Saudi Arabia cut output by more than agreed (to its lowest in almost two years), which supported the price. Thanks to these circumstances, light crude climbed above $53, but did this move change anything in the overall picture of the commodity?
Let’s examine the charts below to find out (charts courtesy of http://stockcharts.com).
From the weekly perspective, we see that crude oil came back above the long-term red support/resistance line, invalidating the earlier breakdown. Although this is a positive event, the red gap continues to keep gains in check. Additionally, the sell signals generated by the indicators are still in play, supporting oil bears and another attempt to move lower.
Are there any other technical factors that could encourage oil bears to act? Let’s take a closer look at the daily chart and find out.
Quoting our yesterday’s alert:
(…) crude oil reversed and rebounded, invalidating the earlier breakdown under the June and October highs. Additionally, this move materialized on higher volume, which suggests further improvement in the coming day(s). How high could light crude go? In our opinion, if the commodity extends gains from here, we may see an increase to around $53.51, where the 61.8% Fibonacci retracement (based on the January decline) is.
On the daily chart, we see that light crude extended gains as we had expected and increased to our upside target. Did this increase change the very short-term outlook? In our opinion, it didn’t. Why? Because the black gold is still trading under the previously-broken lower border of the blue rising trend channel, which means that as long as there is no invalidation of the breakdown below this line all upswings will be nothing more than a verification of the earlier breakdown. Additionally, yesterday’s move materialized on smaller volume, which doesn’t confirm oil bulls’ strength.
What’s next? Taking into account the buy signals generated by the indictors, it seems that oil bulls will try to push the commodity higher - even to the previously-broken lower border of the blue rising trend channel. Nevertheless, as long as there is no comeback above this line, the short-term outlook remains bearish, which means that short positions continue to be justified from the risk/reward perspective.
Summing up, although crude oil moved a bit higher yesterday, short positions continue to be justified, because light crude is still trading below the previously-broken lower border of the blue rising rend channel, which suggests another attempt to move lower in the coming days.
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 $56.45 and an initial downside target at $45.81) 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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