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Oil Trading Alert: Crude Oil - Sinking or Rebounding?

Oil Trading Alert originally published on Aug 17, 2015, 9:04 AM


 

Trading position (short-term; our opinion): No positions are justified from the risk/reward perspective.

Although crude oil climbed above $43.50 on Friday, the combination of a stronger greenback and the Baker Hughes report pushed the commodity lower. As a result, light crude gained 1.28%, but closed the day below important resistance zone. What's next?

Friday's data showed that U.S. producer prices were higher for a third straight month in July and factory output increased at the fastest rate in eight months, which supported the greenback and made crude oil less attractive to users of other currencies. Additionally, Baker Hughes reported that U.S. oil rigs increased by two to 672 last week for the week ending on August 7, marking the fourth straight week of weekly builds. In these circumstances, light crude gave up some gains, but closed the day above the March low, invalidating earlier breakdown. Will we see higher values of the commodity in the coming week? (charts courtesy of http://stockcharts.com).

Light Crude Oil Weekly Chart
Larger Image

Looking at the weekly chart we see that although crude oil slipped under the March low, the commodity rebounded and closed the week above this important support level.

What impact did this move have on the very short-term picture? Let's examine the daily chart and find out.

Light Crude Oil Daily Chart
Larger Image

From this perspective, we see that crude oil moved little higher on Friday and invalidated the breakdown under the March low. Although this is a positive signal, which suggests further improvement, light crude is still trading under the solid resistance zone created by the green and blue declining resistance lines and also the green horizontal line based on the Jan low. Additionally, Friday's move is quite small (compared to previous upward moves marked with blue) and materialized on tiny volume, which means that oil bulls are not as strong as it seems at the first sight.

What does it mean for the commodity? In our opinion, all the above in combination with the current position of the indicators (there are no buy signals, which could encourage oil bulls to act) suggests that another test of the support area created by the March low and the red declining support line is very likely. Nevertheless, we believe that the risk of re-entering short positions is too high at the moment. The reason? We think that the best answer to this question will be the quote from our previous Oil Trading Alert:

(...) Please consider the way crude oil declined in January 2015. Black gold declined sharply at first, but the final days (and weeks) of the decline were not sharp - crude oil declined slowly and the thing that was indeed sharp, was the corrective upswing that we saw in the final part of the month. We wouldn't want to be holding short positions should something like that happened once again and the risk of such action is not negligible.

Summing up, crude oil moved higher and invalidated earlier breakdown under the March low. Despite this (seemingly positive) development, light crude remains under the solid resistance zone, which increases the probability of another test of the red declining support line. Nevertheless, in our opinion, the outlook for crude oil is not bearish enough to justify opening another short positions - at least not yet. We're happy with the profits that we took off the table recently and we don't want to risk losing capital before a trade is really justified from the risk/reward point of view. We will continue to monitor the market, look for another profitable trading opportunity and report to you accordingly.

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

Trading position (short-term; our opinion): No positions are justified from the risk/reward perspective.

 

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