Making Sense of the Dilly-Dallying Days in Crude Oil

Crude oil seesaw trading goes on, as yesterday’s upswing gave way to a lower open earlier today. Given the declining USD, couldn’t black gold have acted just a little bit stronger? Let’s take a look what it means for our open position – time to head for the exits, or brace ourselves for a more opportune exit point being hit?

Let’s start with the most important sentence in mind. We are closing the speculative long position and taking respectable profits off the table.

Why did we change our mind regarding the most likely short-term potential of the black gold? Because of how crude oil used to react the USD Index these days, how it reacted to it yesterday, and how it is reacting today.

We previously wrote the following:

In the very recent past – the last several days – the USD Index and crude oil moved in the opposite ways. Thursday’s and Friday’s upswing in crude oil corresponded to declining USD. And the USD Index seems to be bottoming.

Instead of bottoming right away after we wrote the above, the USD Index moved even lower and reached its next support level. The way the link between crude oil and the USDX behaved, is what made us lower the profit-take level. You see, crude oil continued to take USD’s lead, but the strength of crude oil’s response was weak. Oil moved higher, but insignificantly so. This link is even more bearish based on what we see today. If a price doesn’t bullishly react to what used to be a bullish factor, it's an indication that the price wants to move in the opposite direction.

To be clear – the above is not enough to make the short-term outlook bearish on its own. However, it is enough to make the short-term outlook relatively neutral. And if the outlook is neutral, then (opening) no position, neither long nor short, is justified from the risk to reward point of view.

The question remains whether one should close the position right away or wait for a better exit price. We initially (before today’s decline in the USD Index) planned to bet on a very short-term increase in crude oil price. However, today’s lack of a big rally is too bearish for us to justify keeping the long position any longer.

The chart below is what we had prepared a few hours before publishing this analysis.

What we focused on was the breakout above the rising resistance line and crude oil’s breakout above the declining short-term resistance line and its verification. It reversed at the intersection of two lines, which increased the odds that we had just seen a reversal.

Indeed, crude oil moved higher after the above moment, but based on a big pre-market decline in the USD Index, crude oil was able to rally to only 53.30. This means that it was not able to even get back to its recent high. This is a very bearish sign and one that almost makes us open a short position right away.

No, we are not opening it (we prefer to see how crude oil closes today), but we do think that the profits on the long position should be taken off the table. At the moment of writing these words, crude oil is trading at $52.97, which provides us with a significantly more than $1 profit since we entered the current long position earlier this month, close to the bottom.

The next trade will probably be a short position, at least based on the monthly crude oil chart below.

Crude oil reversed in a profound way in September, which suggests that lower prices are likely in the following months. The sell signal from the monthly Stochastic indicator also remains intact. That’s in tune with the same indicator on the daily timeframe. The outlook is simply not as bullish as it used to be in the previous days.

Consequently, in our view, no position is currently justified form the risk to reward point of view. We might open a new short position soon, but we are not doing so right now.

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