Oil Trading Alert originally sent to subscribers on March 14, 2016, 8:42
AM.
Trading position (short-term; our opinion): No positions
are justified from the risk/reward perspective.
On Friday, crude oil gained 1.24% as rig count declined to the lowest
level ever. Thanks to this news, light crude hit a fresh March high, but will
we see further rally in the coming week?
In our last Oil
Trading Alert, we wrote the following:
(…) earlier today, the IEA, said that non-OPEC output would fall by
750,000 barrels per day (bpd) in 2016 compared to its previous estimate of
600,000 bpd. Additionally, U.S. production alone would decline by 530,000 bpd
in 2016. Thanks to this news, crude oil futures extended gains in a
pre-market trading, hitting a fresh high of $38.95, which suggests that the
commodity could also move higher after the market’s open and even approach
the barrier of $40 later in the day (especially if today’s Baker Hughes
report would be bullish).
As it turned out, on Friday, crude oil extended gains and hit a fresh high
of $39.02 after the Baker Hughes report showed that the total number of U.S.
oil rigs dropped by 9 to 480 for the week ending on March 4, which was the
lowest level in history (the previous lowest record came on April 23, 1999
when the rig count slipped to 488). On top of that, the number of active U.S.
oil drilling rigs dropped by 6 to 386, which was the 12th consecutive week of
weekly declines. Thanks to these numbers, light crude re-tested the major
resistance levels, but will we see further rally in the coming week? Let’s
take a look at the charts and find out what can we infer from them (charts
courtesy of http://stockcharts.com).
On the weekly chart, we see that although crude oil moved higher once
again, the red declining resistance line (based on the Sep 29, Jun 22 and Oct
12 weekly closing prices) continues to keep gains in check.
Are there any other factors that could encourage oil bears to act? Let’s
examine the daily chart and find out.
From this perspective, we see that crude oil moved higher once again,
hitting a fresh March high. Despite this increase, the red resistance zone is
still in play (there wasn’t daily closure above it), which in combination
with the medium-term picture and the proximity to the barrier of $40 could
encourage oil bears to act and trigger a downward move from here in the
coming days.
Additionally, we should keep in mind that the daily CCI and Stochastic
Oscillator are overbought and there are also negative divergences between
them and light crude. On top of that, when we take a closer look at the size
of volume that accompanied Friday’s increase we clearly see that it was quite
small (compared to the volume that we saw last Monday or Wednesday), which
suggests that the bulls may weaken.
Finishing today’s alert, we’ll take a look at the relationship between oil
and gold once again.
As you see on the weekly chart, although the oil-to-gold ratio moved
higher once again, the green resistance line (based on the Mar and Aug lows)
continues to keep gains in check, suggesting that reversal from here is very
likely. Why? Because we saw a similar price action in late Jan. Back then the
above-mentioned resistance triggered a sharp decline in the following weeks,
which increases the probability that history will repeat itself once again
and we’ll see lower values of the ratio (and crude oil) in the coming
week(s).
What about gold? Taking into account the fact that the recent increases in
the ratio corresponded to the upward move in gold, it seems that reversal of
the ratio will translate into lower values of the yellow metal. Nevertheless,
if you would like to know more about gold
as an investment, we encourage you to sign
up for Gold & Silver Trading Alerts or the All-Inclusive Package that
includes it.
Finishing today’s alert, we would like to draw your attention to the
current situation in crude oil futures, which moved sharply lower in a
pre-market trading after Iranian Oil Minister’s comments. Bijan Zanganeh said
that his country won't join a production freeze deal until Iran increases its
output to 4 million barrels a day (bpd). Taking this fact into account, it
seems that crude oil will also erase some of recent gains later in the day.
If we see such price action, the first downside target would be around
$37.21, where the Mar 10 low is.
Summing up, the red resistance zone (marked on the daily
chart) and the red resistance line (seen on the weekly chart) continues to
keep gains in check (in terms of daily and weekly closing prices).
Additionally, the current position of the indicators and the proximity to the
psychologically important barrier of $40 suggests that reversal and lower
values of the commodity are just around the corner.
Very short-term outlook: mixed with bearish bias
Short-term outlook: mixed with bearish bias
MT outlook: mixed
LT outlook: mixed
Trading position (short-term; our opinion): No positions
are justified from the risk/reward perspective. We will keep you – our
subscribers – informed should anything change.
Thank you.
Nadia Simmons
Forex & Oil Trading Strategist
Przemyslaw Radomski, CFA
Founder, Editor-in-chief
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