One-day Rebound or Something More?

Trading position (short-term; our opinion): Short positions with a stop-loss order at $45.32 and profit-take order at $35.72 are justified from the risk/reward perspective.

On Tuesday, crude oil gained 4.15% after China's central bank cut interest rates. Thanks to this news, light crude reversed and invalidated Monday’s breakdown under the support line. Despite this move, the commodity still remains under the barrier of $40. Will it stop further improvement in the coming days?

Yesterday, crude oil moved higher after the market’s open supported by news that the People’s Bank of China cut interest rates by 25 basis points to 4.6% and the reserve requirement ratio for large lenders by 0.5% to 18.0%. As a result, light crude rebounded in the following hours, climbing to an intraday high of $39.89. Will we see an invalidation of the breakdown under $40 in the coming days?

Quoting our last Oil Trading Alert:

(…) we should keep in mind that, yesterday’s downswing approached crude oil to the upper green support zone marked on the weekly chart below. Taking this fact into account, we think that corrective upswing from here should not surprise.

Looking at the weekly chart, we see that the situation developed in line with the above scenario and crude oil moved little higher (compared to the preceding declines).

What impact did this move have on the very short-term picture? Let’s check.

From this perspective we see that yesterday’s upswing took the commodity above the previously-broken red and blue declining lines. In this way, light crude invalidated earlier breakdown below them, which is a positive signal. But is it so favorable for oil bulls as it seems at the first glance?

Looking at the daily chart we see that yesterday’s upswing materialized on smaller volume than Monday’s decline. Secondly, despite Tuesday’s increase, the commodity is still trading under the key technical level of $40 and also below the Mar low of $42.41. Thirdly (and the most importantly), the recent rebound is smaller than previous upswings (marked with blue), which suggests that oil bulls are not stronger than they were in previous weeks.

Taking all the above into account, we believe that as long as the commodity remains under the key technical level of $40 and there is no bigger upward move (bigger than previous upswings) lower values of crude oil are more likely than not.

Summing up, although crude oil invalidated the breakdown under the red declining support line, the commodity remains under the key technical level of $40 and the Mar low. Additionally, yesterday’s upswing is smaller than previous upward moves, which doesn’t confirm oil bulls’ strength at the moment, suggesting another attempt to move lower in the coming days.

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

Trading position (short-term; our opinion): Short positions with a stop-loss order at $45.32 and profit-take order at $35.72 are justified from the risk/reward perspective.