Crude Oil: Despite Recent Move Higher, Expect a Sell-Off

By Nadia Simmons  MAY 05, 2014 2:10 PM

The commodity has been closing below the psychological barrier, which might spur investors to start selling.

 


On Friday, crude oil gained 0.72% as stronger-than-expected US employment data and ongoing concerns over tensions between Russia and Ukraine weighted on the price. In this way, light crude rebounded and hit an intraday high of $100.14. Did this rally change anything in the overall outlook?
 
On Friday, the Labor Department showed that the US economy added 288,000 jobs in the previous month, well above expectations for a 210,000 increase. The report also showed that the US unemployment rate dropped to 6.3% in April, while analysts had expected a fall to 6.6%. In reaction to these better-than-expected numbers, the commodity rebounded and moved above the key level of $100. Although the US economy added more new jobs than expected (which suggests more workers on the roads and stronger fuel demand), the record-high stockpile continued to cloud the outlook for higher prices. As a reminder, on Wednesday the Energy Information Administration showed in its weekly report that crude oil inventories rose once again and hit an all-time high of 399.4 million barrels.
 
Let's move on to the technical changes in crude oil (charts courtesy of http://stockcharts.com).
 

Click to enlarge

Looking at the weekly chart above, we clearly see that the situation hasn't changed much, as crude oil still remains below the lower border of the triangle, the psychological barrier of $100, and the 50-week moving average. Although the breakdown isn't confirmed, further deterioration is likely to be seen, in my opinion. Therefore, the bearish scenario from my firm's previous take posted on Wednesday is up to date:
 
(...) if the commodity extends losses and drops below the psychological barrier of $100, we will likely see further deterioration and a drop even to around $95, where the medium-term support line (based on the June 2012 and January 2014 lows) is. At this point, it's worth noting that the CCI and Stochastic Oscillator generated sell signals, which suggests that another attempt to move lower should not surprise us.
 
Now that we've looked at the situation from the weekly perspective, let's zoom in and move on to the daily chart.
 

Click to enlarge

Quoting my firm's previous post:
 
...crude oil moved lower once again and reached the bottom of the correction that we saw at the turn of March and April. If this support level holds, we may see a corrective upswing in the coming day, and the first upside target will be the previously broken level of $100.
 
As you can see on the daily chart, crude oil rebounded and reached its first upside target on Friday. Despite this improvement, the commodity gave up the gains in the following hours and closed the day below the key level of $100 for the third time in a row. Taking this fact into account, we can conclude that all bearish factors that we noticed in the previous week (a confirmed breakdown below the lower border of the medium-term triangle, the lower border of the short-term trend channel, and the psychological barrier of $100) remain in place and still support the bearish case. At this point, it's also worth noting that the breakdown in the United States Oil Fund LP ETF (NYSEARCA:USO) is confirmed after Friday's session, which is an additional negative sign. Therefore, I think that another attempt to move lower and test the strength of the nearest support level shouldn't surprise us.
 
If it's broken, we'll likely see further deterioration and a drop to one of the downside targets that my firm discussed previously:
 
(...) In the case of the breakdown under the lower border of the trend channel, declines may push the price to around $97, where the size of the downswing will correspond to the height of the formation. Nevertheless, in our opinion, the confirmation of the breakdown below the medium-term line is more important because it suggests an even bigger move. In this case, the correction may be deeper and take light crude to around $94.20. At this point, it's worth noting that the first downside target is supported by the March low of $97.37, and the latter corresponds to the 78.6% Fibonacci retracement based on the entire January-March rally.
 
Summing up, although crude oil moved higher, it still remains below the previously broken important resistance lines. Additionally, the commodity closed the day below the key level of $100 for the third time in a row, which means that the breakdown below this psychological barrier is confirmed. In our opinion, this is a strong bearish signal, which will likely encourage oil investors to push the sell button in the coming days and trigger further deterioration.
 
Very short-term outlook: bearish
Short-term outlook: bearish
Medium-term outlook: mixed
Long-term outlook: mixed
 
Trading position (short term): Short. Stop-loss order: $102.50.

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.

Twitter: @SunshineProfits
No positions in stocks mentioned.