Trading position (short-term; our opinion): Short position with a stop-loss order at $63.41 and the initial downside target at $59.38 is justified from the risk/reward perspective.
Let's recall our Friday's observations:
(...) Crude oil futures extended gains, breaking above the upper border of the rising green trend channel during yesterday's session. This upswing took the futures right to the red gap. Let's see how this has reflected upon the daily indicators.
They look quite extended, suggesting that the space for additional gains may be limited and that a reversal is probably just around the corner.
Should it be the case, and the futures move lower from here, the first downside target for the sellers will be yesterday's green gap. If the bears close it, the next target will be the lower border of the purple consolidation and the next green gap, which is where our initial downside target currently is.
The situation has developed in tune with the above, and crude oil futures have indeed pulled back to our first downside target. However, the bears just couldn't close the green gap, and the bulls took advantage, forcing a daily close above the upper border of the rising green trend channel.
This is certainly a bullish development, and the buyers followed through with more upside action. While crude oil futures moved above $61.90, the sizable red gap remain in play. It keeps supporting the bears and lower values of the futures in the coming week(s).
Let's take a step back, and assess the weekly perspective now.
While oil keeps closing at higher and higher prices, the volume behind these moves is progressively declining. This raises doubts about the bulls' strength for the coming week(s).
Let's zoom even further out, and inspect the monthly chart.
The long-term perspective shows that recent weeks' price action hasn't really changed the overall situation much. Crude oil is still trading inside the blue consolidation below three key resistances (the red and orange bearish gaps and the 61.8% Fibonacci retracement), which form a major resistance zone for the coming week(s).
Additionally, the volume is decreasing on a monthly basis, which raises the probability of a reversal in the near future.
Therefore, as long as there is no breakout above the said consolidation, another move to the downside would not surprise us and reversal in the coming week(s) is very likely. Not even if the bulls try to push the commodity higher on a very short-term basis, would change that.
Taking all the above into account, we continue to think that lower values of crude oil and crude oil futures are ahead of us. Should it be the case and the futures move lower, the first downside target will be the green gap created on Thursday. If it is closed, the next target will be the lower border of the purple consolidation and the next green gap, which is where our initial downside target currently is.
Summing up, while crude oil futures extended recent gains, the red gap ahead coupled with the extended position of the daily indicators warn of a high likelihood of an upcoming reversal lower. This is unchanged by the bears being repelled on Friday. The short position continues being justified from the risk-reward perspective, and it is supported by both the weekly and monthly perspectives.
Trading position (short-term; our opinion): Short position with a stop-loss order at $63.41 and the initial downside target at $59.38 is justified from the risk/reward perspective.
Thank you.
Nadia Simmons
Forex & Oil Trading Strategist
