Trading position (short-term; our opinion): No positions are justified from the risk/reward perspective.
On Tuesday, crude oil extended losses and hit a fresh 2017 low, but will we see lower prices of the black gold in the coming days?
Crude Oil’s Technical Picture
Let’s take a closer look at the charts and find out (charts courtesy of http://stockcharts.com).
On the weekly chart, we see that crude oil extended losses and hit a fresh 2017 low of $42.94. Thanks to this drop, light crude also broke below the 38.2% Fibonacci retracement, which opened the way to the mid-November low of $42.20.
But will we see further deterioration? Let’s take a closer look at the daily chart.
On Monday, we wrote the following:
(…) we think that light crude just verified the earlier breakdown under the red line.
If this is the case, we’ll see a reversal from around $45 and another attempt to move lower in the coming week. How low could crude oil go? In our opinion, the first downside target will be around $43.08 (the 38.2% Fibonacci retracement marked on the weekly chart). In this area are also the September and November 9 lows and the red dashed support line seen on the daily chart (around $43-$43.07).
From today’s point of view, we see that the situation developed in line with the above scenario and crude oil not only reached, but also slipped temporary below our next downside targets.
What’s next for Crude Oil?
Looking at the daily chart, we see that the green support zone (created by the September lows) was strong enough to stop oil bulls in November. Although crude oil declined sharply in the middle of that month, oil bulls reacted very quickly, which resulted in a reversal candlestick and further improvement in the following days.
Taking this fact into account and combining it with the red dashed support line (parallel to the lower border of the red declining trend channel) and the current position of the indicators (the RSI dropped to the lowest level since early May, the Stochastic Oscillator generated the buy signal and there is a visible positive divergence between the CCI and the price of light crude) it seems to us that the space for declines is limited. Why? Because even if light crude breaks below the green support zone and the red dashed support line, not far from current levels are also the mid November low and the lower border of the blue declining trend channel, which together could stop oil bears and trigger a reversal in the coming day(s).
Finishing today’s alert, it’s worth keeping in mind that although the American Petroleum Institute showed that gasoline inventories rose 346,000 barrels despite the start of the U.S. summer driving season, the report also showed a larger-than-expected drop in crude oil inventories (crude oil stocks fell 2.720 million barrels, beating expectations for a drop of 2.106 million barrels), which makes the fundamental picture a bit unlear.
Therefore, taking this fact and the technical picture of light crude into account, we think that closing short positions (they were opened when crude oil was trading around $49) and taking profits off the table is justified from the risk/reward perspective at the moment.
Summing up, crude oil extended losses and reached the solid support zone created by the September and November lows. This area is also reinforced by the red dashed support line, which together with the current position of the daily indicators suggests a reversal and higher prices of crude oil in the coming days.
Very short-term outlook: mixed
Short-term outlook: mixed
MT outlook: mixed
LT outlook: mixed
Trading position (short-term; our opinion): No positions are justified from the risk/reward perspective. We will keep you – our subscribers – informed should anything change.
Thank you.
Nadia Simmons
Forex & Oil Trading Strategist
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager
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