Oil Trading Alert originally published on Jul 27, 2015, 7:33 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 extended losses after bearish Baker Hughes report. As a result, light crude lost 1.82% and hit a fresh multi-month low. Where will the commodity head next in the coming days?
On Friday, Baker Hughes showed in its weekly report that U.S. oil rigs increased by 21 to 659, which fuelled worries over another increase in domestic crude oil inventories and weighed on investors' sentiment. In this environment, light crude moved lower once again and closed the day below $48. Will we see a fresh multi-month low in the coming days? (charts courtesy of http://stockcharts.com).
Quoting our previous commentary:
(...) oil bulls didn't manage to hold gained levels, which resulted in a reversal and decline. With this downswing, light crude (...) hit a fresh multi-month low of $48.21, which means that lower values of light crude are just around the corner.
Looking at the daily chart, we see that the situation developed in line with the above scenario and light crude moved lower once again. Additionally, the commodity closed the day below $48, which means that the way to lower prices is open.
How low could the commodity go in the coming days? We believe that the best answer to this question will be the quote from our Friday's alert:
(...) the next downside target for oil bears would be around $47.05-$47.55, where the Apr 10 low (in terms of an intraday and opening prices) is. If it is broken, crude oil will likely test the lower border of the support zone created by the 76.4% and 78.6% Fibonacci retracement levels (around $46.72-$47.17).
What impact did this move have on the medium-term picture? Let's check.
From this perspective, we see that crude oil closed another week under the red resistance zone created by the Feb highs, which confirms that the downtrend is still in cards. Additionally, sell signals generated by the indicators remain in place, supporting oil bears and further deterioration.
Finishing today's Oil Trading Alert we would like to draw your attention to the stocks-to-oil ratio once again.
In our alert posted on Jul 17, we wrote the following:
(...) many times in the past (we marked them with green) local bottoms in the ratio have corresponded to local tops in crude oil. Therefore, when the ratio bounced off the 38.2% Fibonacci retracement (based on the entire rally) and moved sharply higher, we saw a decline in crude oil. Taking this fact into account, and combining it with buy signals generated by the indicators, we think that higher values of the ratio (and further declines in light crude) are just around the corner.
From today's point of view we see that the ratio extended gains (as we had expected), which translated to lower prices of crude oil. Taking into account buy signals generated by the indicators and rising volume in previous weeks (which confirms the direction of the major move), we think that the ratio will test the Mar high in the coming week(s). If this is the case, and we see such price action, light crude will extend losses hit a fresh multi-month low in near future.
Summing up, crude oil moved lower once again, hitting a fresh multi-month low and making our short positions even more profitable. Last week's decline confirms that the downtrend remains in place, suggesting lower values of the commodity in the coming days (especially when we factor in sell signals generated by the weekly indicators and the current picture of the stocks-to-oil ratio).
Very short-term outlook: bearish
Short-term outlook: bearish
MT outlook: bearish
LT outlook: bearish
Trading position (short-term; our opinion): Short positions with a stop-loss order at $65.23 are justified from the risk/reward perspective.
