Trading position (short-term; our opinion): Short positions (with a stop-loss order at $39.12) are justified from the risk/reward perspective.
On Friday, crude oil lost 1.14% as concerns over a global supply glut, the situation in China and the Middle East continued to weigh on investors sentiment. Thanks to these circumstances, light crude closed the week under the 2009 low. Does it mean that we’ll see a test of the barrier of $30 in the coming weeks?
Although Friday’s Baker Hughes report showed that U.S. oil rigs fell by 20 to 516 (which was the third consecutive week of weekly drops), concerns over crude oil demand caused by the recent massive sell-off in China (as a reminder, China consumes around 10.5 million barrels per day, which makes the country the world's second-largest consumer of oil) continued to weigh and resulted in a weekly closure under the 2009 low. Will we see a test of the barrier of $30 in the coming weeks? Let’s examine charts and find out (charts courtesy of http://stockcharts.com).
Quoting our Friday’s alert:
(…) the lower border of the red declining trend channel triggered a rebound in the following hours, but the commodity closed another day under the Dec low. Additionally, sell signal generated by the Stochastic Oscillator remains in place, which in combination with yesterday’s huge volume suggests another attempt to move lower in the coming day(s).
On the daily chart, we see that although crude oil moved sharply higher after the market’s open, oil bulls didn’t manage to push light crude higher. As a result, the commodity reversed and declined below $33, which looks like a verification of the breakdown under the Dec low. If this is the case, such price action is a bearish signal, which suggests further deterioration in the coming week.
If crude oil declines from here, the initial downside target will be around $31.30 where the lower border of the red declining trend channel currently is. At this point, it is also worth noting that the sell signal generated by the Stochastic Oscillator continues to support oil bears and further declines.