Oil Trading Alert: Dark Clouds Over Crude Oil
Oil Trading Alert originally published on July 7, 2014, 8:03 AM
On Thursday, crude oil declined to its lowest levels since June 10 as situation in Libya overshadowed U.S. economic data. As a result, light crude closed the day below the medium-term support line. Will this event encourage oil bears to push the price lower?
On Thursday, the U.S. Department of Labor reported that non-farm payrolls rose by 288,000 in June, beating expectations for an increase of 212,000. Meanwhile, the unemployment rate dropped to 6.1% from 6.3% in May. Although these stronger-than-expected employment data indicated growing demand for petroleum products, crude oil didn't increase sharply, instead, we noticed a 0.14% loss and a daily close slightly above $104 per barrel. What happened?
As we mentioned earlier, the commodity declined to its lowest levels since June 10 on expectations that a deal between the Libyan government and rebels could bring halted oil exports back to the global markets. On Thursday, oil officials said that Libya's National Oil Co. may formally lift a ban on exports from two eastern oil terminals. What impact could it have on the oil market? If we see such action, a resumption of Libyan exports would reduce concerns that an insurgency in Iraq could lead to supply disruptions there and will likely push the price of light crude lower. However, we should keep in mind that some previous pledges to let Libyan exports restart haven't been respected or were followed by new interruptions. Therefore, we think that as long as we do not see shipments from these ports, we should still keep an eye on the current situation in Iraq and also focus on the technical picture of crude oil. So, let's find out what can we infer from the charts (charts courtesy of http://stockcharts.com).
From this perspective, we see that crude oil extended losses in the previous week and declined to the previously-broken upper line of the blue triangle. If this support line withstand the selling pressure, we'll see a rebound from here and a corrective upswing to the recent highs. However, if it is broken, crude oil will extend the current correction and the initial downside target will be around $101.60, where the June low is. At this point it's worth noting that slightly below this level is a strong support zone created by the 50-week moving average (currently at $101.26) and the lower line of the trend channel (and lower border of the blue triangle), which may pause further deterioraion. Please note that the position of the indicators supports the bearish scenario at the moment as sell signals remain in place.
Once we know the medium-term picture, let's check the very short-term outlook.
As you see on the daily chart, crude oil declined below the medium-term blue line (the upper line of the triangle that we saw on the weekly chart). Although this is a strong bearish signal, so far, the breakdown is not confirmed. On one hand, if oil bulls do not invalidate it and crude oil moves lower, the initial downside target will be the 50-day moving average (currently at $103.27). At this point, it's worth noting that this area is supported by the 50% Fibonacci retracement (based on the Apr.-June rally). Therefore, if it holds, we'll likely see an attempt to move above the blue resistance line. However, if it is broken, the next target for oil bears will be around $102.14, where the 61.8% Fibonacci retracement is. Please keep in mind that sell signals generated by the indicators remain in place, supporting the bearish case at the moment.
Summing up, crude oil moved lower and broke below important medium-term support line, which is a strong negative signal. Taking this fact into account and combining it with the current position of the indicators, we remain bearish and think that further correction and lower values of crude oil are still ahead us. Therefore, short positions (which are already profitable) are still justified from the risk/reward perspective.
Very short-term outlook: bearish
Short-term outlook: mixed with bearish bias
MT outlook: mixed
LT outlook: mixed
Trading position (short-term; our opinion): Short. Stop-loss order at $109.20.