Oil Trading Alert: Crude Oil Drops to Neck Line

By: Nadia Simmons & Przemyslaw Radomski | Tue, May 19, 2015
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Oil Trading Alert originally published on May 18, 2015, 9:13 AM


 

Trading position (short-term; our opinion): Short positions with a stop-loss order at $65.23 are justified from the risk/reward perspective.

On Friday, crude oil gained 0.49% as a weaker greenback supported the price. As a result, light crude bounced off the neck line of a bearish formation. Will we see further improvement in the coming days?

On Friday, the Federal Reserve Bank of New York reported that its Empire State manufacturing index rose less-than-expected (to 3.9, missing forecasts for an increase to 5.00). Additionally, the University of Michigan's preliminary reading of the consumer sentiment index for May slipped to 88.6 from a final April reading of 95.9, missing analysts' forecasts for a reading of 96.0. Thanks to these disappointing numbers, the USD Index declined to Thursday's low, making crude oil more attractive for buyers holding other currencies. As a result, light crude bounced off the neck line of a bearish formation, but will we see higher values of the commodity in the coming week? (charts courtesy of http://stockcharts.com).

Crude Oil Monthly Chart
Larger Image

On the long-term chart, we see that Friday's move was too small to be visible (not to mention change anything) from this perspective. As you see crude oil still remains under the key resistance zone (created by the 200-month moving average and the long-term blue line), which means that as long as there is no breakout above this area higher values of the commodity are not likely to be seen and further deterioration is more likely than not.

How Friday's upswing affect the very short-term chart? Let's take a closer look at the chart below and find out.

Crude Oil Daily Chart
Larger Image

On the daily chart, we see that crude oil extended losses after the market's open and approached the neck line of the head and shoulders formation. The proximity to this important support encouraged oil bulls to act and resulted in a rebound in the following hours. Despite this move, the commodity is still trading well below the recent high and the previously-broken lower border of the rising wedge. Additionally, Friday's upswing materialized on tiny volume, which doesn't confirm oil bulls' strengths. On top of that, the Stochastic Oscillator generated a sell signal, supporting the bearish case. As a reminder, we saw similar position of the indicator at the beginning of March. Back then, a buy signal generated by the indicator triggered a very short-lived upswing, which erased some of earlier drop. Despite this move, the commodity reversed and declined sharply after a sell signal, which suggests that we could see further deterioration in the coming week (especially when we factor in the gravestone candlestick formation and sell signals generated by the RSI and CCI).

Taking all the above into account, we believe that what we wrote in our Oil Trading Alert posted last Tuesday is still up-to-date:

(...) we can notice a potential head and shoulders formation. If this is the case, and oil bears take advantage of this opportunity, light crude will extend declines and test the strength of the green support zone (created by the Feb highs around $54-$54.24) in the coming days (please note that in this area the size of the downswing will correspond to the height of the formation).

Nevertheless, (...) oil bears will have to push the commodity below the green support line based on the May lows (the neck line of the formation is currently around $58.14) before we see an acceleration of the decline.

On top of that, (...) crude oil broke below the lower border of the rising wedge, which suggests a drop to the green support zone created by the Feb highs (in this area the size of the downward move will correspond to the height of the formation).

Summing up, although crude oil bounced off the neck line of a bearish formation, the commodity still remains under the key resistance zone (marked on the monthly chart), which is also reinforced by the recent highs and the lower border of the rising wedge. This suggests that even if light crude moves little higher from here, the space for further gains will be limited and a breakdown below the neck line of the formation is just around the corner.

Very short-term outlook: bearish
Short-term outlook: bearish
MT outlook: mixed with bearish bias
LT outlook: mixed with bearish bias
Trading position (short-term; our opinion): Short positions with a stop-loss order at $65.23 are justified from the risk/reward perspective.

 


 

Nadia Simmons

Author: Nadia Simmons

Nadia Simmons
Sunshine Profits.com
Forex & Oil Trading Strategist
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Nadia Simmons

Nadia is a private investor and trader, dealing in currencies, commodities (mainly crude oil), and stocks. Using her background in technical analysis, she spends countless hours identifying market trends, major support and resistance zones, breakouts and failures. In her writing, she presents complex ideas with clarity that enables you to easily understand market changes, and profit on them. Nadia is the person behind Sunshine Profits' 3 premium trading services: Forex Trading Alerts, Oil Trading Alerts Alerts, and Oil Investment Updates.

All essays, research and information found above represent analyses and opinions of Nadia Simmons and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Nadia Simmons and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Nadia Simmons is not a Registered Securities Advisor. By reading Nadia Simmons's reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Nadia Simmons, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

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Przemyslaw Radomski

Author: Przemyslaw Radomski

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
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Przemyslaw Radomski

Przemyslaw Radomski, CFA (PR) is a precious metals investor and analyst who takes advantage of the emotionality on the markets, and invites you to do the same.

His company, Sunshine Profits, publishes analytical software that anyone can use in order to get an accurate and unbiased view on the current situation.

Recognizing that predicting market behavior with 100% accuracy is a problem that may never be solved, PR has changed the world of trading and investing by enabling individuals to get easy access to the level of analysis that was once available only to institutions.

High quality and profitability of analytical tools available at www.SunshineProfits.com are results of time, thorough research and testing on PR's own capital.

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Disclaimer: All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

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