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.
Although crude oil moved sharply lower after the market’s open, the commodity reversed and rebounded as the combination of a weaker greenback and bullish Baker Hughes (NYSE:BHI) report supported the price. As a result, light crude bounced off its key support zone once again, but did this move change anything in the short-term picture of the commodity?
Although Friday’s data showed that the U.S. unemployment rate remained unchanged at 5.1% in the previous month, the U.S. Labor Department reported that the economy added 142.000 jobs in September, missing expectations for a 203.000 increase. Additionally, average hourly earnings were flat in September, missing forecasts for a 0.2% rise. These disappointing numbers, raised uncertainty over whether or not the Federal Reserve will raise interest rates before the end of the year, which pushed the US dollar index sharply lower, making crude oil more attractive for buyers holding other currencies. On top of that, Baker Hughes report showed that U.S. oil rigs fell by 26 to 614 for the week ending on Sept. 25. It marked the fifth straight weekly decline and the sharpest drop since the week ending on April 24. Thanks to these circumstances, light crude bounced off its key support zone once again, but did this move change anything in the short-term picture of the commodity? Let’s examine charts and find out (charts courtesy of http://stockcharts.com).
From this perspective, we see that crude oil closed another week under the 38.2% Fibonacci retracement and the upper black line (a potential right shoulder of the head and shoulders formation), which suggests that further deterioration is just a matter of time.
Having said that, let’s focus on the very short-term changes.
In our previous commentary, we wrote the following:
(…) the key resistance zone was strong enough to stop further improvement, which resulted in a sharp decline. With this downswing, light crude came back below the previously-broken blue support/resistance line, invalidating earlier breakout and slipping to the 50-day moving average. Without a doubt these are bearish signals, which suggest lower values of the commodity in the coming days.
Looking at the daily chart, we see that oil bears pushed the commodity lower after the market’s open (as we had expected), which resulted in a drop to the blue support zone. As you see on the chart, may times in the past weeks, this key support was strong enough to stop further deterioration and trigger a rebound. On Friday, history repeated itself once again and the commodity bounced off this area, approaching the upper border of the blue declining trend channel. What’s next?
Taking into account the fact that the Stochastic Oscillator generated a buy signal, we think that oil bulls will try to push light crude higher in the coming day(s). In this case, the initial upside target would be around $46.25, where the blue resistance line is.
Finishing today’s alert, please keep in mind that even if the commodity increases from here, we believe that as long as light crude remains under the key resistance zone created by the 38.2% Fibonacci retracement and the previous highs (and reinforced by the bearish evening star formation), further rally is not likely to be seen.
Summing up, crude oil bounced off the blue support zone once again, the upper border of the declining trend channel keeps gains in check. Additionally, light crude closed another week under important medium-term resistance levels, which suggests lower values of the commodity in the coming week. This means that the outlook for crude oil remains bearish and short positions 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 (yes, that far as the medium-term outlook is unlikely to change as long as crude oil stays below the declining medium-term resistance line) and initial (!) target price at $35.72 are justified from the risk/reward perspective. We will keep you – our subscribers – informed should anything change.