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Oil Trading Alert: Crude Oil Erases Gains

Oil Trading Alert originally published on Nov 30, 2015, 6:56 AM


 

Trading position (short-term; our opinion): Short positions with a stop-loss order at $54.12 and initial (!) target price at $35.72 are justified from the risk/reward perspective.

On Friday, crude oil lost 3.31% as a stronger greenback weighed on the price of the commodity. Thanks to these circumstances, light crude moved away from its key resistance area and closed another week below it. Will this event encourage oil bears to act in the coming days?

On Friday, the USD Index extended gains as expectations for a December rate hike continued to support the U.S. currency. As a result, the index climbed to an intraday high of 100.25, approaching the Mar high of 100.38 and making crude oil more expensive for buyers holding other currencies. In this environment, light crude reversed and declined sharply, moving away from its key resistance area and closed another week below it. Will this event encourage oil bears to act in the coming days? Let's examine charts and find out (charts courtesy of http://stockcharts.com).

Light Crude Oil Daily Chart
Larger Image

On Wednesday, we wrote the following:

(...) crude oil extended gains and climbed to the blue resistance zone created by the Jan and Feb lows and reinforced by the blue resistance line (marked o the weekly chart). With this upswing, the commodity also reached the blue resistance zone created by the Sept and Oct lows and reinforced by the 38.2% Fibonacci retracement (based on the Nov declines).

What does it mean for light crude? In our opinion, this solid resistance zone will be strong enough to stop further improvement and trigger a pullback. The reason? Firstly, (...) the commodity gave up some of earlier gains and closed the day under the black dashed resistance line. Secondly, the size of volume that accompanied yesterday's upswing was smaller than day before, which doesn't confirm oil bulls' strength. Thirdly, although daily indicators generated buy signals, the sell signal generated by the weekly Stochastic Oscillator remains in place supporting oil bears.

Taking all the above into account, we think that reversal and lower values of the commodity are more likely than not.

As you see on the daily chart, the situation developed in line with the above scenario and crude oil moved sharply lower on Friday. With this downswing, the commodity invalidated a small breakout above the black dashed resistance line and erased all Wednesday's gains, which is a strong negative signal that suggests further deterioration in the coming week (even if oil bulls will try to re-test the key resistance area once again). If this is the case, and light crude declines from here, we'll see another test of the barrier of $40 in near future.

How did this price action affect the medium-term picture? Let's check.

Light Crude Oil Weekly Chart
Larger Image

From this perspective we see that although crude oil moved higher in the previous week, the blue resistance area stopped further improvement. As a result, the commodity reversed and declined, which suggests that could see a verification of earlier breakdown. At this point it is also worth noting that light crude closed another week under this zone, which means that the breakdown is confirmed by three consecutive weekly closures (a bearish signal). On top of that, a sell signal generated by the Stochastic Oscillator remains in place, which suggests that further deterioration is just around the corner.

Summing up, the key resistance zone stopped oil bulls, triggering a sharp decline. As a result, light crude closed another week below it, which suggests that earlier upward move was just a verification of earlier breakdown. Taking all the above into account, we believe that light crude will re-test the barrier of $40 in near future. Therefore, short positions (which are already profitable as we opened them when crude oil was trading around $46.69) continue to be justified from the risk/reward point of view.

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

Trading position (short-term; our opinion): Short positions with a stop-loss order at $54.12 and initial (!) target price at $35.72 are justified from the risk/reward perspective.

 

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