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November 22nd, 2017

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Sharp Decline in Crude Oil and Its Consequences


By Nadia Simmons
Forex & Oil Trading Strategist
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager
Sunshine Profits - Tools for Effective Gold & Silver Investments
August 16th, 2017

On Monday, official data showed that Chinese demand for crude oil declined in July, which together with a stronger greenback and concerns over a rise in OPEC output weighed on investors' sentiment and pushed the price of the black gold lower. As a result, light crude lost 2.52% and closed the day below $48. How low could the commodity go in the coming days?

Crude Oil's Technical Picture

Let's take a closer look at the charts and find out (charts courtesy of http://stockcharts.com).


In our Monday's alert, we wrote that the medium-term green line and the purple declining resistance line continued to keep gains in check in the previous week. Additionally, crude oil closed the week under the previously-broken 50-week moving average, which together with the size of volume, which accompanied last week's decline suggests that further deterioration is just around the corner.

From today's point of view, we see that the situation developed in line with the above scenario and crude oil extended last week losses. What's interesting, when we take a closer look at the above chart, we can notice that the commodity increased slightly before the decline, which looks like a verification of the breakdown under the 50-week moving average (a bearish development).

How did this drop affect the very short-term picture? Let's check.


Yesterday, we wrote that the commodity invalidated the earlier breakdown, which is a positive development.

But is this as bullish as it seems at the first sight? In our opinion, it's not. Why? Firstly, despite Friday's move light crude remains under the resistance area created by the 61.8% Fibonacci retracement ( based on the entire 2017 downward move), the barrier of $5, the 200-day moving average and the upper border of the purple rising trend channel. Secondly, the sell signals generated by the daily indicators are still in cards, supporting oil bears and lower prices of crude oil. Thirdly, Friday's increase materialized on smaller volume than earlier declines, which suggests that oil bulls are not as strong as it seems.

Looking at the daily chart, from today's point of view, we see that although crude oil moved a bit lower after the market's open oil bulls didn't manage to hold gained levels, which resulted in a pullback. Thanks to yesterday's decline light crude dropped below the lower border of the blue consolidation, which together with the sell signals suggests further deterioration and the realization of our last week's bearish scenario:

(...) How low could the commodity go?

If light crude moves lower from current levels, the first downside target will be the last week low, which creates the lower border of the blue consolidation (at $48.37). If it is broken, the next downside target for bears will be around $47.25, where the 38.2% Fibonacci retracement based on the entire recent upward move is. However, taking into account all negative above-mentioned factors, we think that light crude will move even lower and test (…) the 50% Fibonacci retracement (…)

Why? Because in this area the size of the downward move will correspond to the height of the blue consolidation. Nevertheless, before we see the realization of this scenario oil bears will have to push the price of the commodity below the lower border of the purple rising trend channel and the above-mentioned retracement.

Summing up , yesterday, crude oil verified the breakdown under the 50-week moving average and broke below the lower border of the blue consolidation, which opened the way to lower levels and made our short positions more profitable. Additionally, the sell signals generated by the indicators remain in cards, suggesting further deterioration in the coming days.

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

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By Nadia Simmons
Forex & Oil Trading Strategist
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager
Sunshine Profits - Tools for Effective Gold & Silver Investments
August 16th, 2017

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.


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WEDNESDAY EDITION

November 22nd, 2017

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