Trading position (short-term; our opinion): Short positions (with a stop-loss order at $54.15 and the initial downside target at $45.55) are justified from the risk/reward perspective.

Although OPEC agreed to extend production cuts to March 2018, the organization rejected deeper cuts, which pushed the price of crude oil sharply lower. Thanks to yesterday’s decline, light crude came back below the barrier of $50, but will we see further declines?

Let’s take a closer look at the charts and find out what are they telling about future moves (charts courtesy of http://stockcharts.com).

The medium-term outlook.

Yesterday, we wrote the following:

(…) although the CCI and the Stochastic Oscillator generated the buy signals and light crude invalidated the earlier breakdown under the 50-week moving average, this week’s size of volume is tiny, which doesn’t confirm oil bulls’ strength, suggesting that reversal may be just around the corner.

From today’s point of view, we see that the situation developed in line with the above scenario and crude oil moved sharply lower. Thanks to yesterday’s decline light crude came back below the barrier of $50 and 50-week moving average, which resulted in a drop to the previously-broken green support line. Let’s check how this decline affected

The very short-term chart.

Quoting our previous alert:

(…) light crude moved above the 70.7$ retracement, but despite this improvement, oil bears managed to trigger a pullback, which invalidated the earlier breakout above the retracement and Tuesday’s high.

Additionally, yesterday’s decline materialized on bigger volume than earlier increases, which suggests that oil bears are getting stronger. On top of that, the Stochastic Oscillator generated the sell signal, while the CCI is overbought, which increases the probability of reversal and declines in the coming days.

Looking at the daily chart, we see that oil bears pushed the commodity lower as we had expected. In this way, the black gold invalidated not only the breakout above the 50-day moving average, but also the climb above the 200-day moving average, which together with the sell signals generated by the daily indicators suggests further deterioration in the coming week. At this point it is also worth noting that the size of volume, which accompanied yesterday’s decline was huge, which confirms oil bears’ strength.

However, it is worth keeping in mind that light crude slipped to the long-term green support line based on the August and November lows, which suggests that we may see a small (compared to yesterday’s decline) rebound before another move to the downside.

Nevertheless, if crude oil drops under the green line, the initial downside for oil bears will be around $45.55, where the previously-broken lower border of the red declining trend channel (currently) is.

Taking all the above into account, we believe that opening short positions is justified from the risk/reward perspective.

Summing up, short positions are justified as crude oil moved sharply lower and invalidated the earlier breakout above the barrier of $50, the 50- and 200-day moving averages. Additionally, yesterday’s move materialized on huge volume, confirming oil bears’ strength and suggesting lower prices 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 $54.15 and the initial downside target at $45.55) are justified from the risk/reward perspective. We will keep you – our subscribers – informed should anything change.

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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