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Oil Trading Alert: Time for Reversal?

Oil Trading Alert originally published on Aug 5, 2015, 5:33 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 Tuesday, crude oil moved higher after the market's open supported by hopes for another decline in U.S. stockpiles. Thanks to these circumstances, light crude bounced off the multi-month low and gained 1.48%. Did this increase change anything in the short-term picture of the commodity?

Yesterday, the Shanghai Composite Index increased by more than 3%, which in combination with expectations that the API and EIA reports would show another decline in domestic crude oil inventories supported the price of light crude. As a result, crude oil reversed and bounced off Monday's low. What impact did this move have on the short-term picture of crude oil? (charts courtesy of http://stockcharts.com).

$WTIC Light Crude Oil - Spot Price (EOD) CME
Larger Image

The first thing that catches the eye on the above chart is an invalidation of the breakdown below the green support line based on the previous lows. This positive event encouraged oil bulls to act, which resulted in a rally to an intraday high of $46.23. But did this move change anything in the short-term picture? Not really. The reason? Firstly, yesterday's upswing is much smaller than previous upward moves (marked with blue). Secondly, the size of volume that accompanied Tuesday's increase is much smaller compared to what we saw in recent days. Thirdly, and most importantly, the commodity remains under the previously-broken Apr low and the 78.6% Fibonacci retracement. Therefore, what we wrote in our previous commentary is up-to-date:

(...) we believe that as long as crude oil remains below $46.72-$47.05 all upswings would be nothing more than a verification of the breakdown under the previously-broken Apr low and the 78.6% Fibonacci retracement. Therefore, in our opinion, lower values of the commodity are just around the corner (especially when we factor in the rising size of volume in the previous days, which reflects the growing strength of oil bears).

Summing up, although crude oil moved little higher, the commodity is trading under the previously-broken Apr low, which means that the downtrend remains in place and suggests that lower values of the commodity are still ahead us.

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.

 

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