Oil Trading Alert: Crude Oil - Similarities to November
Oil Trading Alert originally published on Aug 18, 2014, 9:07 AM
Trading position (short-term; our opinion): In our opinion no positions are justified from the risk/reward perspective.
On Friday, crude oil gained 1.82% as news of escalating tensions in Ukraine outweighed mixed U.S. economic data. Because of these circumstances, light crude bounced off a support zone created by the Fibonacci retracement levels and came back near the previous lows. Will we see further rally in the coming days?
On Friday, data showed that U.S. producer price inflation rose 0.1%, core producer price inflation (without food, energy and trade) rose 0.2% in July and U.S. industrial production rose 0.4% in the previous month. Although these numbers were quite positive, the preliminary Thomson Reuters/University of Michigan consumer sentiment index dropped to a nine-month low of 79.2 in August (missing analysts' expectations for a rise to 82.5), while the New York Federal Reserve said that its Empire State manufacturing index fell to a four-month low of 14.69 this month from 25.60 in July.
Despite these mixed numbers, geopolitical events in Eastern Europe supported the price. News that Ukrainian troops destroyed a portion of a Russian column of armored vehicles inside the country fueled concerns that the conflict will escalate and disrupt crude shipments out of Russia. As a result, crude oil bounced off the recent lows and came back above $97 per barrel. Will the rally continue? Let's check what can we infer from the technical picture (charts courtesy of http://stockcharts.com).
In our Oil Trading Alert posted on Aug 6, we wrote the following:
(...) we should keep in mind that sell signals remain in place (despite the fact that the CCI and Stochastic Oscillator are oversold), which suggests that even if we'll see a short-term improvement, the commodity may test the strength of the 200-week moving average (...) - similarly to what we saw several times in the past (for example in April, November 2013 and also at the beginning of the year).
As it is clear from the weekly chart, the situation developed in line with the above-mentioned scenario. Although crude oil reached our downside target in the previous week, this deterioration was only temporarily (at least from today's point of view) and the commodity rebounded - just like in the past (we marked these points with green). As is well known, the history tends to repeat itself, therefore, we believe that crude oil will move higher from here in the coming week (or weeks). At this point, it's also worth noting that oil bulls have an additional ally at the moment- the rising, long-term support line, which supports a pro-growth scenario.
What is the short-term perspective?
Quoting our Oil Trading Alert posted on Aug 6:
(...) if crude oil declines below the recent lows, closing the day below them, we may see a drop to the next downside target around $94.76-$95.21, where the strong support zone (created by the 76.4% and 78.6% Fibonacci retracements based on the entire 2014 rally and the Jan. 27 bottom) is.
Looking at the daily chart, we see that although crude oil declined sharply to the above-mentioned downside target on Thursday, the green support zone withstood the selling pressure, which triggered an equally strong upswing on the following day. Despite this move, the commodity still remains below the resistance zone created by the March low and the recent highs, which suggests that we may see a pullback later in the day. If this is the case, light crude could re-test the strength of the green support zone. Nevertheless, even if we see such price action, it seems to us that the next sizable move will be to the upside. The reason? When we take a closer look at the chart and compare the current situation to the one that we saw at the end of November, we clearly see that back then the support zone created by the 76.4% and 78.6% Fibonacci retracements successfully stopped the decline, triggering an upward move, which corrected over 38.2% of earlier losses. As we have pointed out before, the history tends to repeat itself, which suggests that we'll likely see a similar price action in the coming days. In this case, we may see an increase to around $99.73-$99.96, where the very strong resistance one(created by the 38.2% Fibonacci retracement evel based on the entire June-Aug decline, the 200-day moving average and the black declining resistance line) is.
Before we summarize today's Oil Trading Alert, we would like to draw your attention to positive divergences between all three indicators and the price of light crude (we also saw similar readings in November) , which suggests that corrective upswing is just around the corner.
Summing up, although crude oil extended losses and hit a fresh multi-month low of $95.26 in the previous week, it seems to us that the combination of the rising long-term support line, the 200-week moving average and the green support zone marked on the daily will be strong enough to stop further declines. Taking into account all similarities to the situation that we saw in November, we believe that the next move will be to the upside. If we don't see a continuation of the decline today, we will strongly consider opening long positions tomorrow or in the following days.
Very short-term outlook: mixed with bullish bias
Short-term outlook: mixed
MT outlook: mixed
LT outlook: bullish
Trading position (short-term; our opinion): No positions are justified from the risk/reward perspective at the moment, but we will keep you informed should anything change.