Trading position (short-term; our opinion): No positions are justified from the risk/reward perspective.

On Wednesday, crude oil gained 3.34% after the EIA weekly report showed a larger-than-expected decline in gasoline inventories. As a result, light crude reversed and came back above the barrier of $40, invalidating earlier breakdown. Will this positive signal encourage oil bulls to push the commodity higher?

Although yesterday’s U.S. Energy Information Administration report showed that U.S. crude inventories rose by 1.4 million barrels, these bearish numbers were overshadowed by a larger-than-expected decline in gasoline inventories (they declined by 3.3 million barrels, easily beating analysts' expectations for a 0.2 million draw). Additionally, the report also showed that crude oil inventories in Oklahoma dropped by 1.12 million barrels, affecting positively investors’ sentiment. As a result, light crude reversed and came back above the barrier of $40, invalidating earlier breakdown. Will this positive signal encourage oil bulls to push the commodity higher? Let’s examine charts below and find out (charts courtesy of http://stockcharts.com).

Yesterday, we wrote:

(…) crude oil extended losses and broke below the long-term black declining support line, which is a negative signal. Nevertheless, in our opinion it will turn into bearish only if crude oil would closes the week under this important line. Until this time the breakdown is unconfirmed and reversal can’t be ruled out.

The first thing that catches the eye on the weekly chart is invalidation of the breakdown under the long-term black declining line. This is a positive signal, which suggests further improvement. However, such price action will be more likely and reliable if crude oil closes the week above this important line.

Are there any other technical factors that could encourage oil Bulls to act? Let’s examine the daily chart and find out.

Quoting our previous alert:

(…) although the commodity declined under the barrier of $40 and closed the day below it, the breakdown is not confirmed. Additionally, the green support zone created by the 50% Fibonacci retracement and the Apr 18 low continues to keep declines in check, increasing the probability of reversal and rebound in the coming day(s).

From this perspective we see that the situation developed in line with the above scenario and the green support zone triggered a quite sharp increase yesterday. With this upward move the commodity invalidated earlier breakdown under the barrier of $40, which is a bullish signal that suggests further improvement- especially when we factor in the size of volume that accompanied yesterday's increase (it was significant compared to what we saw during this week's declines). Additionally, the RSI and Stochastic Oscillator generated buy signals, supporting oil bulls and higher prices of light crude in the coming days. If this is the case and light crude extends increases from here the initial upside target would be the previously-broken lower border of the black declining trend channel (currently around $42.85).

Nevertheless, in our opinion, such price action would be more reliable if crude oil breaks above the 200-day moving average (currently at $40.85) and invalidates earlier breakdown. Until this time another test of the strength of the barrier of $40 can’t be ruled out.

Summing up, the green support zone encouraged oil bulls to act, which resulted in invalidation of the breakdown under the barrier of $40. Taking this positive event into account and combining it with buy signals and the size of volume that accompanied yesterday's session we think that further improvement is just around the corner (even if light crude re-test the strength of the barrier of $40).

Very short-term outlook: mixed with bullish bias
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 informed should anything change, or should we see a confirmation/invalidation of the above.

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.

Since it is impossible to synchronize target prices and stop-loss levels for all the ETFs and ETNs with the main market that we provide this level for (crude oil), the stop-loss level and target price for popular ETN and ETF (among other: USO, DWTI, UWTI) are provided as supplementary, and not as “final”. This means that if a stop-loss or a target level is reached for any of the “additional instruments” (DWTI for instance), but not for the “main instrument” (crude oil in this case), we will view positions in both crude oil and DWTI as still open and the stop-loss for DWTI would have to be moved lower. On the other hand, if crude oil moves to a stop-loss level but DWTI doesn’t, then we will view both positions (in crude oil and DWTI) as closed. In other words, since it’s not possible to be 100% certain that each related instrument moves to a given level when the underlying instrument does, we can’t provide levels that would be binding. The levels that we do provide are our best estimate of the levels that will correspond to the levels in the underlying assets, but it will be the underlying assets that one will need to focus on regarding the sings pointing to closing a given position or keeping it open. We might adjust the levels in the “additional instruments” without adjusting the levels in the “main instruments”, which will simply mean that we have improved our estimation of these levels, not that we changed our outlook on the markets.

Thank you.

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

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