Oil Trading Alert originally published on May 28, 2014, 8:24 AM
On Tuesday, crude oil lost 0.22% as a stronger U.S. dollar weighted on the price. In this way, light crude reversed, invalidating the breakout above an important resistance line. What does this show of weakness mean for the very short-term picture?
Yesterday, the U.S. dollar moved higher as positive housing and consumer confidence data supported the currency. The Commerce Department reported that core durable goods orders (without volatile transportation items) increase 0.1% in April, missing expectations for a 0.3% increase. Despite this disappointing data, U.S. durable goods orders rose 0.8% in the previous month, beating expectations for a 0.5% fall. Additionally, the Conference Board reported that its consumer confidence index rose to 83.0 this month from 81.7 in April, while the Standard & Poor's/ Case-Shiller house price index rose 12.4% in March from a year earlier, above expectations for a gain of 11.8%.
As is well known, a stronger greenback makes oil less attractive commodity on dollar-denominated exchanges, which is bearish for the commodity. Therefore, an increase in the U.S. currency pushed light crude below $104. Despite this drop, crude oil reversed and erased some losses. Which technical factor supported the price? Let's see (charts courtesy of http://stockcharts.com).
From this perspective, we see that the situation hasn't changed much as crude oil still remains below the blue resistance line based on the recent highs (the upper border of the triangle). Therefore, what we wrote yesterday is up-to-date:
(...) If this line holds, we will likely see a pullback and the nearest support will be the 50-week moving average (currently at $100.80). However, if oil bulls do not give up and push the price above the resistance line, we will see further improvement and an increase to a fresh 2014 high.
(...) the last week's increase materialized on relative small volume, which questions the strength of oil bulls. On top of that, the RSI approached the level of 60. We saw similar reading in April and also earlier in March. Back then, such readings preceded declines. Therefore, if history repeats itself once again, we may see a correction in the coming week (or weeks).
Having said that, let's focus on the very short-term picture.
Quoting our last Oil Trading Alert:
(...) the position of the indicators, doesn't look bullish at the moment. There is a negative divergence between the CCI and crude oil, while the Stochastic Oscillator is overbought (well above the level of 80). On top of that, the RSI reached its highest level since April, approaching the barrier of 70, which suggests (...) a pause or a pullback (...) Therefore, if crude oil reversed from here, invalidating the breakout, it will be a strong bearish signal that will trigger a correction in the coming days.
Yesterday, we noticed such price action as crude oil declined below the black medium-term resistance line. With this downswing, light crude reached the previously-broken lower line of the rising trend channel, which stopped further deterioration and triggered a corrective upswing (similarly to what we saw in the previous days). Despite this small rebound, the commodity remains below the resistance zone created by the blue and black resistance lines and also the April high. Therefore, we believe that even if light crude moves higher from here, this combination will be strong enough to stop further improvement and trigger a pullback in the coming days. Additionally, we are convinced that if crude oil drops below the lower border of the rising trend channel (currently around ($103.70), a correction will accelerate and the downside target for oil bears will be around $102.30, where the black medium-term declining support line and the 38.2% Fibonacci retracement based on the entire May rally are.
Summing up, the most important event of yesterday's session was an invalidation of the breakout above the medium-term black rising line. This is a strong bearish signal, which together with the current position of the indicators and the above-mentioned resistance zone provide us with bearish implications and suggests that we'll see at least a correction in the coming days. As we have pointed out before, if crude oil drops below the lower border of the rising trend channel, a correction will accelerate and the downside target for oil bears will be around $102.30.
Very short-term outlook: bearish
Short-term outlook: bearish
MT outlook: mixed
LT outlook: mixed
Trading position (short-term): Short. Stop-loss order to $105.50.