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Oil Trading Alert: Crude Oil - Breakdown or Trap?

Oil Trading Alert originally published on June 30, 2014, 8:00 AM


 

Although crude oil moved little higher on Friday, hitting an intraday high of $106.19, the commodity reversed and posted its second weekly loss in three weeks as the immediate threat of losing Iraqi oil supply due to violence in the country faded. As a result, light crude closed the week below the medium-term support. Will it trigger further deterioration?

The price of crude oil has risen recently as fears that an insurgency in northern Iraq would spread to the south and disrupt the nation's oil production. However, the insurgency hasn't reached the southern part of the country where the major production and export facilities are located, and Iraq's oil output hasn't been affected, which encouraged oil investors to sell the commodity for profits.

Additionally, although the Thomson Reuters/University of Michigan consumer sentiment index increased to 82.5 in June from 81.2 in May (beating expectations for a 82.2 reading), investors didn't get rid of concerns over the outlook for the wider economic recovery as Wednesday's disappointing U.S. gross domestic product data continued to weigh. Because of these circumstances, crude oil lost 0.84% in the previous week, declining below the medium-term support line. Will this bearish event trigger further deterioration? Let's check the technical picture of crude oil (charts courtesy of http://stockcharts.com).

Crude Oil Weekly Chart
Larger Image

As you see on the above chart, crude oil closed the previous week below the medium-term black rising line, which suggests further deterioration. If this is the case, and oil bulls do not invalidate the breakdown, we'll see a downward move to around $102, where the declining black medium-term support line and the 50-week moving average are.

Having discussed the medium-term picture, let's take a closer look at the daily chart.

Crude Oil Daily Chart
Larger Image

Looking at the above chart, we see that the situation in the very short-term hasn't changed much as crude oil is still trading in the narrow range between the resistance zone (created by the 76.4%-78.6% Fibonacci retracement levels and the medium-term black resistance line) and the green support zone (based on the March, April, June 10 highs and recent lows). Therefore, what we wrote in our previous Oil Trading Alert is up-to-date:

(...) If this support zone holds, we'll see another corrective upswing to around $107.30-$107.68, where the resistance zone is. On the other hand, if oil bears do not give up and show their claws one again, we will see a breakdown in the nearest future and a correction to at least the previously-broken blue support line (currently around $104.40). Please keep in mind that sell signals generated by the indicators remain in place, supporting the bearish scenario.

Summing up, although crude oil moved little higher, the overall situation remains unchanged as the commodity is still trading in the narrow range. In our opinion, as long as there is no breakdown below the green support zone (or breakout above the resistance zone) another sizable move is not likely to be seen. Nevertheless, taking into account the current position of the indicators (and the breakdown below the black support line on the weekly chart), we think that further deterioration and lower values of crude oil are still ahead us.

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

Trading position (short-term; our opinion): Short. Stop-loss order at $109.20.

Thank you.

 

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