Oil Trading Alert: Crude Oil Declines Sharply
Oil Trading Alert originally published on Feb 27, 2014, 9:35 AM
Trading position (short-term): In our opinion no positions are justified from the risk/reward perspective.
On Wednesday, crude oil lost 2.27% as tensions cooled in Ukraine and U.S. supply data missed investors' expectations. Because of these circumstances, light crude erased all its gains from Monday's jump and dropped below $101 per barrel.
Yesterday, soft U.S. service-sector data weakened the price of light crude and pushed it below $103 per barrel. The ADP nonfarm payrolls data showed that the U.S. private sector added 139,000 jobs in February, well below expectations for an increase of 160,000. Additionally, the ISM's purchasing managers' index fell to 51.6 in February from 54.0 in January (while analysts had expected a drop to 53.5 in February). At this point, it's worth noting that February's PMI is the lowest since February 2010.
Later in the day, the U.S. Energy Information Administration showed in its weekly report that U.S. crude oil inventories rose by 1.4 million barrels in the week ended Feb. 28, missing expectations for an increase of 1.3 million barrels. Although this increase was largely in line with market expectations (and the price of light crude declined only slightly from its prior level after the report's release), distillate stockpiles (which were expected to fall by 1.1 million barrels but instead rose by 1.4 million barrels) disappointed investors and sent crude oil to its lowest level in more than two weeks.
Having discussed the above, let's move on to the technical changes in crude oil (charts courtesy of http://stockcharts.com).
Quoting our last Oil Trading Alert:
(...) light crude closed the day below February high, which is not a positive signal (...) when we factor in the current position of the indicators, it seems that further deterioration is just around the corner (...) the RSI and Stochastic Oscillator generated sell signals, while the CCI is very close to doing it. If oil bulls do not trigger a corrective upswing today, crude oil may extend losses and drop to the upper line of the rising trend channel.
Looking at the above chart, we see that although the buyers tried to push the price higher, they failed, which triggered a sharp decline in the following hours. With this downswing, crude oil not only dropped to the upper line of the rising trend channel, but also reached the December high. If this support line is broken, we will see further deterioration and the first downside target will be the lower border of the rising trend channel, which is slightly above the 38.2% Fibonacci retracement level based on the recent rally (which corresponds to the 200-day moving average at the moment). Looking at the position of the indicators, we see that the CCI generated a sell signal (while the Stochastic Oscillator declined below the level of 80), which supports sellers and suggests that the bearish scenario is likely to be seen in the coming day.
Having discussed the current situation in light crude, let's take a look at WTI Crude Oil (the CFD).
In our previous Oil Trading Alert, we wrote the following:
(...) WTI Crude Oil declined to the very short-term rising support line (marked with dark green). If it is broken, we will see a drop to the upper line of the rising wedge (marked with thin blue lines) (...) the CCI and Stochastic Oscillator generated sell signals, which supports the bearish scenario and suggests further deterioration.
As you see on the daily chart, after a breakdown below the very short-term rising support line, oil bears not only pushed the CFD under the upper line of the rising wedge, but also approached the lower border of this formation. If this support line encourages buyers to act, we may see a corrective upswing to one of the previously broken support lines, which serve as resistance at the moment. However, looking at the position of the indicators (sell signals remain in place, supporting sellers), it seems that further deterioration is more likely. If this is the case, the first downside target will be the 38.2% Fibonacci retracement based on the entire rally.
Summing up, the very short-term (and also the short-term) outlook for crude oil has deteriorated as crude oil extended declines and dropped to the rising trend channel range, reaching a support level created by the December high at the same time. As mentioned earlier, if oil bears push the price below it, we will see further deterioration and a drop to the lower border of the rising trend channel or even to the 38.2% Fibonacci retracement level and the 200-day moving average. Please note that this bearish scenario is also reinforced by the current position of the indicators (sell signal in crude oil and also in the CFD remain in place, supporting sellers).
Very short-term outlook: bearish
Short-term outlook: mixed with bearish bias
MT outlook: bullish
LT outlook: mixed
Trading position (short-term): In our opinion, if crude oil drops below the 38.2% Fibonacci retracement level and the 200-day moving average, we will consider opening short positions.