Trading position (short-term; our opinion): In our opinion no positions are justified from the risk/reward perspective.
On Tuesday, crude oil lost 2.10% as worries over conflicts in Ukraine and Iraq waned. As a result, light crude dropped to its lowest level since Jan 21 and slipped below an important support area, hitting an intraday low of $94.26. Will the commodity correct to $93 per barrel in the near future?
Tuesday, the U.S. Commerce Department showed that the number of building permits issued in July jumped 8.1% to 1.052 million units (beating expectations for a 2.5% increase) and U.S. housing starts soared by 15.7% last month to hit 1.093 million units (well above expectations for an increase of 8.6%). Additionally, the U.S. CPI rose 0.1% in the previous month, while core consumer prices (without food and energy costs) increased by 0.1% last month, missing expectations for a 0.2% gain, but the year-on-year rate came in at 1.9%.
Despite these bullish numbers, the price of light crude declined to almost eight month low as concerns over tensions in Ukraine and Iraq eased.
How much more room to decline does the commodity have? Let’s check the technical picture and find out (charts courtesy of http://stockcharts.com).
The situation in the medium term has deteriorated significantly as crude oil declined below its major support levels – the 200-week moving average and the rising, long-term support line. Although this is a strong bearish signal, the week is not over yet. This means that we may see a rebound and invalidation of the breakdown (similarly to what we saw in June 2012) – especially when we take into account the fact that the size of the current correction corresponds to the height of the blue triangle, which could reduce the selling pressure and trigger an upswing in the near future.
Nevertheless, if the commodity closes this week under these two important support levels, we’ll see further deterioration and a drop to the next one – the January low of $91.24.