Oil Trading Alert originally published on June 16, 2014, 10:50 AM
On Friday, crude oil extended gains and hit a fresh nine-month high, supported by the deteriorating situation in Iraq. Thanks to these circumstances, light crude climbed to its next resistance zone. Will oil bulls be strong enough to break it in the near future?
On Friday, crude oil rallied for a second session as Sunni militants continued their advance toward Baghdad, which fueled concerns that Iraq's ample oil production could be threatened. As we mentioned in our previous Oil Trading Alert, although most of Iraq's production is in the south of the country, far from the current violence, oil investors worry that the situation could quickly escalate and disrupt oil shipments. As a reminder, Iraq produced 3.6 million barrels of oil a day - its highest level since before the invasion in 2003. According to the U.S. Energy Information Administration, Iraq was the seventh-largest oil producer in the world last year, therefore, military activity in a large oil producer was bullish for crude oil and pushed the price well above $107 per barrel.
Despite this improvement, light crude reversed after U.S. President Barack Obama said he won't sent troops to Iraq, while the country is still exporting crude oil. Additionally, soft U.S. economic data pushed the price down as well. On Friday, official data showed that U.S. producer price inflation fell 0.2% in May, beating expectations for a 0.1% rise. Core producer price inflation (without food, energy and trade) slipped 0.1% last month, compared to expectations of 0.1% gain. On top of that, a preliminary report showed that the Thomson Reuters/University of Michigan consumer sentiment index fell to 81.2 this month from 81.9 in May, while analysts had expected the index to rise to 83.0 in June.
Can crude oil move higher without disturbing news from Iraq? Let's check the technical picture (charts courtesy of http://stockcharts.com).
From this perspective, we see that crude oil almost touched the long-term declining line without breaking it. Therefore, what we wrote in our previous Oil Trading Alert is up-to-date:
(...) this important line is currently around $107.76 and reinforces the resistance zone (...) the CCI is overbought, while the Stochastic Oscillator approached the level of 80 (...). Connecting the dots, it seems that as long as there is no breakout above this key price level, another sizable move is not likely to be seen.
Having say that, let's zoom in our picture and focus on the very short-term changes.
Looking at the above chart, we see that crude oil extended gains and reached the resistance zone, hitting an intraday high of $107.68. As you see on the daily chart, this strong area stopped further improvement and the commodity reversed, therefore, our last commentary is still valid:
(...) the space for further growth might be limited in the near future. In our opinion, oil bulls could have a tough time breaking through the next resistance zone created by the 76.4% and 78.6% Fibonacci retracement levels (around $107.30-$107.75). The reason for such assumption is not only the fact that this is a strong resistance zone, which usually pauses (or even stops) further improvement, but also the conclusion which emerges from the long-term chart.
Please keep in mind that the RSI reached its highest level since the beginning of March, breaking above the level of 70, while the CCI and Stochastic Oscillator are overbought (additionally, there is a negative divergence between the latter and the price), indicating that correction is just around the corner. If this is the case, the initial downside target for oil bears will be the previously-broken medium-term black rising line (currently around $106.60), which stopped further deterioration on Friday. If it holds, we may see another attempt to break above the resistance zone. However, if it is broken, the current correction will accelerate and the commodity will find support around $104.55, where the upper line of the medium-term triangle (marked with blue) is.
Summing up, although crude oil moved higher, hitting a fresh nine-month high, the overall situation hasn't changed much as the commodity remains below the strong resistance zone created by the long-term declining line and two important Fibonacci retracement levels. As we have pointed out before, as there is no breakout above this key resistance, another sizable move is not likely to be seen and we may see a pullback in the coming days.
Very short-term outlook: bearish
Short-term outlook: mixed with bearish bias
MT outlook: mixed
LT outlook: mixed
Trading position (short-term): In our opinion no positions are justified from the risk/reward perspective at the moment.