Tuesday, September 9, 2014

Crude Oil – North or South?

by Przemyslaw Radomski

Trading position (short-term; our opinion): In our opinion no positions are justified from the risk/reward perspective.

On Friday, crude oil lost 1.22% as disappointing jobs report and ceasefire agreement between Ukraine and pro-Russian separatists weighed on the price. As a result, light crude extended losses and approached the recent lows. Will we see a test of the strength of the Jan low in the coming days?

On Friday, the Department of Labor reported that the U.S. economy added 142,000 jobs in August, missing expectations for a 225,000 increase. Additionally, the report showed that the U.S. unemployment rate ticked down to 6.1% last month, from 6.2%, but in line with expectations. These disappointing numbers pointed to a potential weakening of the economy, fueling fears that the world’s largest oil consumer may demand less energy and fuel.

On top of that, Ukraine signed a ceasefire deal with pro-Russia rebels, which was also bearish for the commodity (as a reminder, Russia is the world’s second-largest exporter and such agreemnt eased fears over the instability in the eastern Ukraine and disruption of Russian oil exports). In this environment, crude oil hit an intraday low of $92.86, approaching the recent lows. Will we see further deterioration in the coming days? (charts courtesy of http://stockcharts.com).

WTI Crude Oil weekly chart

From this perspective, we see that although crude oil moved lower in the previous week, losing 2.51%, the situation in the medium-term hasn’t changed much as crude oil is still trading in a consolidation (marked with blue) between the recent lows and the strong resistance zone created by the previously-broken 200-week moving average and the rising, long-term support line. Therefore, our last commentary is up-to-date:

(…) we still think that as long as there is no invalidation of the breakdown below these levels, the medium-term outlook remains bearish (..) if crude oil drops below the recent lows, the last week’s upswing will be nothing more than a verification of the breakdown and we’ll see a test of the strength of the Jan low of $91.24.

Can we infer something more from the very short-term chart? Let’s check.

WTI Crude Oil daily chart

In our Friday's summary, we wrote the following:

(…) the major driving force behind today’s move might be the U.S. employment report. If it is bullish, the U.S. dollar will strengthen, which may push the commodity lower. On the other hand, if it’s bearish, it will likely fuel worries over the strength of the recovery in the labor market, which may also translate into lower price of crude oil. Taking all the above into account, it seems that the move to the downside is more likely at the moment.

As you see on the above chart, the situation developed in line with the above-mentioned scenario and crude oil declined, erasing the gains that had made on Wednesday and approaching the recent lows. Despite this drop, the overall situation in the very short-term hasn’t changed much as light crude is trading in a consolidation (marked with blue) between Tuesday’ s high of $95.91 and low of 92.68. Therefore, our last commentary is still up-to-date:

(…) we think that as long as there is no breakout above the upper line of the formation (or a breakdown below the lower border) another bigger move is not likely to be seen. (…) What could happen if currency bears show their claws once again? Without a doubt, the initial downside target will be the lower line of the formation. If it’s broken, the commodity will test the strength of the lower border of the declining trend channel, which intersects the Jan low of $91.24 at the moment.

Please keep in mind that the recent corrective upswing is much smaller than the previous one, which means that oil bulls are even weaker than they were in July. Therefore, in our opinion, the downward trend is not threatened at the moment and another attempt to move lower should not surprise us.

Summing up, crude oil extended losses, which approached the commodity to the lower border of the consolidation, increasing the risk of a breakdown. Taking this fact into account, we are convinced that opening long positions is currently not justified from the risk/reward perspective. At this point, it’s worth noting that we do not recommend opening short positions either as the space for further declines might be limited (especially when we factor in the fact that slightly below the Jan low is also the 61.8% Fibonacci retracement level based on the Jun 2012-Aug 2013 rally, which stopped the correction at the beginning of the year).

Very short-term outlook: mixed with bearish bias
Short-term outlook: mixed
MT outlook: bearish
LT outlook: bullish

Trading position (short-term): No positions are justified from the risk/reward perspective at the moment, but we will keep you informed should anything change.

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