On Tuesday, crude oil lost 1.78% as concerns over another build in US crude oil inventories overshadowed ongoing fears over tensions between Russia and Ukraine. Because of these circumstances, light crude declined sharply and invalidated the breakout above the medium-term resistance line. Will this strong bearish signal trigger further deterioration in the coming days? Which important support could stop sellers?
Last Wednesday, the Energy Information Administration showed in its weekly report that US crude oil inventories rose by 10.01 million barrels in the week ending April 11 and stood just 3.4 million barrels below the peak reached in May 2013. Additionally, it was the biggest one-week build in crude oil supplies in 13 years. Therefore, expectations for another build in domestic stockpiles encouraged oil investors to close their long positions and jump to the sidelines ahead of Wednesday's report on crude oil inventories. In reaction to this, light crude moved sharply lower and closed the day below $102 for the first time since April 7.
Let's move on to the technical changes in crude oil (charts courtesy of http://stockcharts.com
Click to enlarge
As you see on the weekly chart above, the situation has deteriorated as crude oil gave up the gains and declined below the medium-term resistance line (marked with black). With this move, the commodity invalidated the breakout above this support line, which is a bearish signal. Taking this fact into account, it seems that we may see further deterioration, and the downside target for the sellers will be the lower line of a triangle, which corresponds to the 50-week moving average at the moment (around $100.25).
Now let's zoom in on our picture and move to the daily chart.
Click to enlarge
My firm previously wrote the following:
(...) if the buyers fail, we may see a drop below the upper border of the rising trend channel, which will likely trigger a decline to the medium-term black line (currently around $103.50).
Looking at the above chart, we see that oil bulls didn't manage to hold gained levels, which resulted in a sharp decline. With this downswing, crude oil dropped not only below the upper border of the rising trend channel, but also under the medium-term support line. In this way, light crude invalidated the breakout above it, which was a strong bearish signal that accelerated further declines.
As you see on the daily chart, the commodity also dropped below the lower line of the consolidation (marked with green). According to theory, such price action may trigger a decline to around $101.30. Yesterday, oil bears almost realized this scenario as crude oil hit an intraday low of $101.51. At this point it's worth noting that slightly below this level is the 50-day moving average, which serves as the nearest support at the moment (at $101.34). If it holds and encourages buyers to act, we may see a corrective upswing in the coming day (or days). However, if it's broken, the next downside target for the sellers will be the 200-day moving average (currently at $100.83).
Before I summarize, I'd like to draw your attention to two important bearish signs. First, yesterday's decline materialized on large volume, which confirms the strength of the sellers. Secondly, the CCI and Stochastic Oscillator generated sell signals. Taking these facts into account, it seems that another attempt to move lower shouldn't surprise us.
The most significant event of yesterday's session was an invalidation of the breakout above the medium-term support/resistance
line. An invalidation of the breakout is a strong bearish signal, which suggests that further deterioration is likely to be seen in the near future (especially when we factor in the size of the volume that we saw yesterday and sell signals generated by the indicators). If this is the case, the first downside target for the sellers will be around $100.83-$101.34, where the 50-day and 200-day moving averages are. If this area is broken, the next price target will be the lower line of a triangle (currently around $100.25). If this strong support is broken, we'll consider opening short positions.
Very short-term outlook: mixed with bearish bias
Short-term outlook: mixed with bearish bias
Medium-term outlook: mixed
Long-term outlook: mixed
In my opinion, no positions are justified from the risk/reward perspective. I'll keep you informed should anything change, or should I see a confirmation/invalidation of the above.
For the full version of this essay and more, visit Sunshine Profits' website.
Nadia is a private investor and trader, dealing in currencies, commodities (mainly crude oil), and stocks. Using her background in technical analysis, she spends countless hours identifying market trends, major support and resistance zones, breakouts, and failures. In her writing, she presents complex ideas with clarity that enables you to easily understand market changes, and profit from them. Nadia is the person behind Sunshine Profits' three premium trading services: Forex Trading Alerts, Oil Trading Alerts, and Oil Investment Updates.
No positions in stocks mentioned.