On Friday, crude oil moved sharply lower and lost over 3% after investors digested the EIA report and reacted to the increase in crude oil inventories. Thanks to these circumstances, light crude invalidated the earlier breakout above the resistance area and slipped well below $48. What does it mean for the commodity?
Crude Oil’s Technical Picture
Let’s take a closer look at the charts below (charts courtesy of http://stockcharts.com).
On Thursday, we wrote the following:
Yesterday, crude oil extended gains, but did this increase change anything? In our opinion, it didn’t. Why? As you see on the weekly chart, despite Wednesday’s move, the black gold is still trading under the purple declining resistance line based on the previous highs and the 50-week moving average, which together were strong enough to stop oil bulls in the previous months.
Additionally, the commodity increased to two important lines: the orange resistance line based on the August highs and the previously-broken lower border of the purple rising trend channel, which increases the probability of reversal – especially when we factor in the size of yesterday’s volume. (…) Wednesday’s move materialized on visibly lower volume than Tuesday’s increase, which raises some doubts about oil bulls’ strength (similarly to what we saw in mid-August).
What’s next for light crude?
(…) if the commodity increases to the lower border of the purple rising trend channel and then reverses and declines, we will see another verification of the earlier breakdown under this short-term resistance, which will give oil bears a very important reason to act in the following days.
From today’s point of view, we see that the situation developed in line with the above scenario as crude oil reversed and declined sharply on Friday. Thanks to this drop light crude created a bearish candle on the weekly chart (visibly longer upper shadow suggests a turning point), which verified the earlier breakdown below the long-term purple declining resistance line (based on the February and April highs) and the 50-week moving average once again. Taking this bearish development into account and combining it with the sell signal generated by the weekly Stochastic Oscillator, we think that further deterioration is more likely than not.
When we take a closer look at the daily chart, we can easily notice more bearish factors. As we assumed in our Thursday’s alert, crude oil reversed and declined after an increase to the lower border of the purple rising trend channel, which resulted in another verification of the earlier breakdown under this short-term resistance. Additionally, the commodity invalidated the earlier breakout above the red resistance zone and closed the day below it. On top of that, CCI and the Stochastic Oscillator generated the sell signals, supporting oil bears and further deterioration.
How low could the commodity go in the coming days?
In our opinion, if light crude declines under the Friday low of $47.27, the next downside target will the August low (around $45.58) or even the 61.8% Fibonacci retracement and the late July low (around $45.26-$45.40).
Summing up, profitable short positions continue to be justified from the risk/reward perspective as crude oil moved sharply lower after another verification of the breakdown below the medium-term purple declining resistance line based on the February and April highs, the 50-week moving average and the lower border of the purple rising trend channel. Additionally, the weekly Stochastic Oscillator and both daily indictors generated the sell signals, supporting further deterioration in the coming week.
Very short-term outlook: bearish
Short-term outlook: mixed with bearish bias
MT outlook: mixed
LT outlook: mixed
Forex & Oil Trading Strategist