Oil Trading Alert: Crude Oil Hits Fresh Monthly High
Oil Trading Alert originally published on Feb 10, 2014, 10:26 AM
Trading position (short-term): In our opinion no positions are justified from the risk/reward perspective.
On Friday, crude oil gained 2.27% as the U.S. dollar weakened against major currencies after a monthly U.S. employment report came in weaker than expected. Thanks to these circumstances, light crude extended gains and rose above $100 per barrel for the first time in more than a month.
The U.S. Labor Department showed that the U.S. economy added 113,000 jobs in January (well below expectations for a 185,000 increase). It's worth noting that it was the weakest two-month stretch of job creation in three years as inclement weather contributed to a slowdown in hiring. Friday's report also showed that 142,000 jobs were added in the U.S. private sector last month, below the 189,000 that economists had expected.
These lower-than-expected numbers have helped push the price of light crude higher by weakening the dollar, making crude oil cheaper for buyers using foreign currencies. Thanks to the recent increases, light crude climbed 2.78% in the previous week and it was the fourth consecutive weekly gain.
Having discussed the above, let's move on to the technical changes in crude oil (charts courtesy of http://stockcharts.com).
Looking at the above chart, we see that the situation has improved significantly as crude oil broke above the strong resistance zone (created by the 200-day moving average, the 38.2% Fibonacci retracement level based on the entire Aug.-Jan. decline and the upper border of the rising trend channel), which is a strong bullish signal. According to theory, if the breakout is not invalidated, we may see further improvement and the upside target would be the 50% Fibonacci retracement. Nevertheless, we should keep in mind that although crude oil climbed above $100, it still remains below the December high, which serves as the nearest resistance at the moment. Additionally, when we take a closer look at the indicators, we see that there are negative divergences between the CCI, Stochastic Oscillator and light crude. On top of that, both indicators are overbought, which suggests caution.
Having discussed the current situation in light crude, let's take a look at WTI Crude Oil (the CFD).
Looking at the above chart, we see that the CFD extended gains and hit a fresh monthly high of $100.18. With this upswing, WTI Crude Oil broke not only above the previous high, but also above the strong resistance zone created by 38.2% Fibonacci retracement level based on the entire Aug.-Jan. decline, the upper blue line (which is also the upper border of the rising trend channel) and the 173.2% Fibonacci projection.
Similarly to what we wrote in the case of crude oil, this is a strong bullish signal. However, despite this growth, the CFD still remains below the December high (which is reinforced by a bearish engulfing candlestick pattern). As you see on the daily chart, earlier today, this resistance level encouraged oil bears to act and we saw first attempt to invalidate the breakout above the upper border of the rising trend channel. If the buyers fail and the CFD closes the day below this support line, it will be a strong bearish signal that will likely trigger further deterioration. At this point it's worth noting that the CCI and Stochastic Oscillator are overbought, which may encourages sellers to act. Nevertheless, as long as WTI Crude Oil remains above the upper border of the rising trend channel, another attempt to move higher can't be ruled out.
Summing up, the situation has improved significantly as crude oil broke above the strong resistance zone and climbed above $100 on relative high volume. With this upswing, light crude (and also the CFD) approached the December high. If this resistance level is broken and the breakout above the upper border of the rising trend channel is not invalidated, we may see further improvement and the upside target would be the 50% Fibonacci retracement. On the other hand, taking into account negative divergences between indicators and light crude, an attempt to return to the trend channel can't be ruled out.
Very short-term outlook: bullish
Short-term outlook: bullish
MT outlook: bullish
LT outlook: mixed
Trading position (short-term): In our opinion, there were no changes in crude oil that justify opening short or long positions at the moment. We will keep you informed should anything change, or should we see a confirmation/invalidation of the above.