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

On Tuesday, crude oil lost 0.96% as disappointing U.S. consumer confidence data and forecasts for warmer weather in early March weighted on the price. Thanks to these news, light crude declined and closed the day below $102 per barrel for the first time since mid-February.

Yesterday, the Conference Board reported that its consumer confidence index dropped to 78.1 in February from 79.4 in January (while analysts had expected an increase to 80.0). These weaker-than-expected data sparked concerns that the world’s largest oil consumer will demand less fuel and energy, which pushed crude oil lower.

Additionally, updated weather forecasts showed that warmer temperatures may return in the first and second week of March (such circumstances could cut demand for heating oil), which had a negative impact on light crude and sent the price lower as well.

Having discussed the above, let’s move on to the technical changes in the crude oil market (charts courtesy of http://stockcharts.com.)

Quoting our last Oil Trading Alert:

(…) crude oil still remains below the 127.2% Fibonacci extension level based on the Dec.-Jan. decline (around $103.34), which serves as the nearest resistance level. If it encourages oil bears to act, we may see further deterioration in the coming day (or days). In this case the first downside target for the sellers would be a support zone created by the December peak, (…) and the upper line of the rising trend channel (…) this scenario is reinforced by the current position of the indicators, which are overbought.

Yesterday, we saw such price action as oil bears triggered a downswing, which took crude oil to its first downside target. However, this strong support area encouraged buyers to act and light crude rebounded in the following hours. Despite this increase, crude oil closed the day below the lower border of the consolidation range, which is not a positive signal. Additionally yesterday’s drop materialized on a higher volume than Monday’s increase, which confirms the strength of the sellers. On top of that, the CCI generated a sell signal, while earlier signals generated by the RSI and Stochastic Oscillator remains in place, supporting the bearish case. Taking all the above into account, it seems that another test of the strength of the support zone in the nearest future should not surprise us. Please note that even if oil bulls manage to push crude oil higher once again, the space for further growth will be likely limited by the 61.8% Fibonacci retracement level.

Having discussed the current situation in light crude, let’s take a look at WTI Crude Oil (the CFD).

Looking at the above chart, we see that the 127.2% Fibonacci extension level encouraged sellers to act who triggered a pullback to the previously-broken upper border of the rising trend channel/rising wedge (to be precise, oil bears even managed to push the CFD below this important support line). However, as it turned out in the following hours, this deterioration was only very temporarily and WTI Crude Oil rebounded, finishing the day above its major short-term support line. Earlier today, we saw another attempt to move lower, but the upper border of the rising trend channel/rising wedge still holds, supporting oil bulls. Taking only this fact into account, it seems that we may see a corrective upswing (even to the February high) in the following hours. Nevertheless, we should keep in mind that all indicators generated sell signals, which favors sellers.

Please note that despite yesterday’s decline, the CFD is still trading in a consolidation range (marked with yellow). So, if we see a drop below the upper border of the rising trend channel/rising wedge, the next downside target for oil bears will likely be around $100.46, slightly above the Feb.18 low. As mentioned earlier, this scenario is still reinforced by the position of the indicators.

Summing up, although we saw the first attempt to break below the upper line of the rising trend channel, oil bears failed and crude oil rebounded. Despite this increase, light crude still remains below the monthly high and the 127.2% Fibonacci extension level, which is a strong resistance level. As mentioned earlier, all indicators generated sell signals, which suggests that another attempt to move lower should not surprise us.

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

Trading position (short-term): In our opinion as long as there is no an invalidation of the breakout above the upper line of the rising trend channel (and light crude remains above the December high), the situation will not be bearish enough to justify opening short positions. We will keep you informed should anything change, or should we see a confirmation/invalidation of the above.

Thank you.

Nadia Simmons
Forex & Oil Trading Strategist
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