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Oil Trading Alert: Crude Oil - Breakdown!

Oil Trading Alert originally published on Jan 6, 2016, 4:03 AM


 

Trading position (short-term; our opinion): Short positions (with a stop-loss order at $39.12 and an initial downside target at $33.66) are justified from the risk/reward perspective.

On Tuesday, crude oil lost 2.47% as a stronger greenback pushed the price lower. As a result, light crude extended losses and broke below important support line. What impact could it have on future moves?

Let's examine charts and find out (charts courtesy of http://stockcharts.com).

Crude Oil Weekly Chart
Larger Image

Looking at the weekly chart, we see that the situation in the medium term remains almost unchanged as the commodity is trading in a consolidation around the Aug low. Nevertheless, today's downswing approached light crude to the lower line of the formation, which could encourage oil bears to at in the coming days.

Can we infer something more from the very short-term picture? Let's examine the dily chart and find out.

Crude Oil Daily Chart
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Quoting our previous Oil Trading Alert:

(...) crude oil declined after another unsuccessful attempt to break above the resistance zone. As you see although crude oil increased after the market's open, the upper border of the rising wedge stopped oil bulls and triggered a pullback. With this downswing, the commodity invalidated earlier breakout above the upper border of the red declining trend channel, which is a negative signal that suggests further deterioration. On top of that, yesterday's drop materialized on sizable volume, which increases the probability of another downswing.

As you see on the daily chart oil bears pushed the commodity lower as we had expected. With Tuesday's downswing, light crude broke below the lower border of the rising wedge, which means that what we wrote on Dec 31 is up-to-date:

(...) if the black support line is broken, a way to $35.35 (and then to Dec low) will be open.

Nevertheless, yesterday's breakdown under the lower line of the formation suggests that we'll see a decline to around $33.96, where the size of the downward move will correspond to the height of the rising wedge. At this point, it is also worth noting that the Stochastic Oscillator generated a sell signal, which is an additional negative factor. Why? When we take a closer look at the daily chart, we see that all sell signals generated by the indicator since June encouraged oil bears to act and translated to bigger or smaller declines. Therefore, in our opinion, the history will repeat itself once again and we'll see lower values of the commodity in the coming days.

Finishing today's alert, we would like to draw your attention to one of our interesting ratios (more of them you'll find in our monthly Oil Investment Updates), which shows the relationship between crude oil and the general stock market.

Crude Oil/S&500 Daily Chart
Larger Image

Looking at the above chart, we see that the ratio invalidated earlier breakout above the upper border of the blue declining trend channel, which is a negative signal that suggests further deterioration in the coming days. But what does it mean for the commodity? As you see on the chart, lower values of the ratio have corresponded to lower prices of light crude in previous months. Therefore, in our opinion, another downward move in the ratio will trigger further deterioration in crude oil in near future (especially when we factor in a sell signal generated by the Stochastic Oscillator).

Summing up, crude oil extended losses and broke below the lower border of the rising wedge, which suggests further deterioration and (at least) a test of the Dec low in the coming days. Therefore, short positions (with a stop-loss order at $39.12 and an initial downside target at $33.66) are justified from the risk/reward perspective.

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 $39.12 and an initial downside target at $33.66) are justified from the risk/reward perspective.

 

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