Breakdown - First Crack in the Crude Oil Dam

Sunshine Profits
    Jul 10, 2020 9:00 AM  PT
Breakdown - First Crack in the Crude Oil Dam
author: Sunshine Profits   

In Oil Trading Alerts yesterday and on Wednesday, we described the reason due to which crude oil's long and boring consolidation is likely coming to an end. This reason was the rising support line that was being tested. We precisely wrote the following:

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"After failing to rally back above the upper border of the March price gap, crude oil declined and then started to slowly climb back up at a certain pace. The rising support line shows this pace.

The thing is that crude oil is breaking below this line, which means that the little momentum that crude oil had, is waning. This is bearish, because it shows that the buying power is drying up or that it's almost gone.

This means that the consolidation – and boredom – are likely almost over. Once the breakdown is verified, the odds for a quick slide will greatly increase.

Given the fundamental news that are reaching (and likely to reach) the market - the increasing Covid-19 cases in the U.S. and globally - it seems that black gold is unlikely to have enough strength to keep pushing higher. Based on the Covid Tracking Project, the latest daily increase in the U.S. Covid-19 cases is over 50k, which is well above the previous high. 

To be precise, the situation is not yet as severe as it was in April, because back then, the number of tests conducted was about half of what it is right now. Still, the breakout in nominal terms is likely to catch media's (and thus investors') attention – especially once the dire economic implications become obvious. The next wave of big fear is likely to unfold in our view. And crude oil is likely to fall once again.

(…) crude oil finally moved below this line. It didn't do so through a big decline, but rather thanks to doing… nothing. The line is ascending, so by trading sideways, the price should at some point move below it. This happened today, and while it's not a confirmed breakdown yet, it is an indication that the move lower is likely just around the corner"

Thanks to yesterday's and today's pre-market decline, the breakdown in crude oil is now clearly visible. That's likely just the first crack in the dam – this move is likely to lead to more selling as the bullish momentum appears to be gone. The upswing really ended in early June, then crude oil made another attempt to move higher – and it failed. The most recent sideways trading was just traders looking at each other waiting who will finally sell first. Someone did and others followed as the buyers were more or less absent. The short positions that we entered on June 23 are likely to become much more profitable in the following days.

Summing up, the short-term outlook for crude oil is bearish based on both the technical indications (in particular, because of crude oil's short-term breakdown) and on the rapidly increasing Covid-19 cases in the U.S., and we see signs that the bigger decline is likely to finally start.

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Contributed by:

Nadia Simmons

Day Trading and Oil Trading Strategist
Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager

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All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

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