Crude Oil - North or South?

Trading position (short-term; our opinion): No positions are justified from the risk/reward perspective.

On Friday, crude oil lost 1.30% after unexpected increase in U.S. oil rig counts. As a result, light crude slipped under $42 and closed the day under the previously-broken 61.8% Fibonacci retracement. What's next for the commodity?

On Friday, crude oil moved higher after the market opened and hit a fresh 2016 high of $42.49. Despite this improvement, the commodity gave up some gains after Baker Hughes' report showed that US oil rigs rose, breaking a 12-week streak of drops. Thanks to this news, light crude slipped under $42 and closed the day under the previously-broken 61.8% Fibonacci retracement. What's next for the commodity? Let's examine charts (charts courtesy of http://stockcharts.com).

Looking at the above charts, we see that the overall situation is a bit unclear. On one hand, crude oil broke above both medium-term declining resistance lines and hit a fresh 2016 high, which is a bullish signal. On the other hand, when we take a closer look at the weekly chart, we notice that the size of volume that accompanied last week's increase wasn't significant and much smaller than week earlier, which suggests that oil bulls' strength may begin to wane.

Additionally, when we focus on the daily chart, we see that Friday's increase approached the commodity to the 200-day moving average - similarly to what we saw in Oct. Back then, this important resistance stopped further improvement and triggered a sizable downward move that took light crude under $30. On top of that, Friday's pullback invalidated earlier breakout above the 61.8% Fibonacci retracement, which is an additional negative signal.

Are there any other bearish factors? As you see on the daily chart, the RSI generated a sell signal (for the first time in more than seven months), while the CCI and Stochastic Oscillator remain overbought. There are also negative divergences between them and the price of light crude, which suggests that the probability of a reversal increases with each passing trading day. The last, but not less important factor is the size of Friday's volume. As you see, it was huge compared to the volume that we saw during recent increases, which suggests that oil bulls may not be as strong as it seems at the first sight.

Finishing today's alert, we'll take a look at the relationship between crude oil and silver.

Looking at the daily chart, we see that the recent upward move took the ratio to the medium-term red declining line based on the Jun and Nov highs. As you see, this resistance was strong enough to stop further improvement in late Nov, which translated into sizable declines in the following months. On Friday, the above-mentioned line stopped the ratio once again, which resulted in a pullback and invalidation of earlier small breakout above this line, which doesn't look bullish.

Additionally, when we focus on the current position of the CCI and Stochastic Oscillator, we see that both indicators were similarly overbought only several times since May. In all previous cases, such high readings preceded sizable downward moves, which suggests that anther bigger decline in the ratio is just around the corner. What does it mean for crude oil? As you see on the above chart, lower values of the ratio corresponded to declines in the commodity in the past (the last move to the upside in the ratio corresponded to the rally in light crude), which suggests that if this relationship remains in place, we'll see lower prices of crude oil in the coming weeks.

What about silver? Although there was a negative correlation between the ratio and the metal in the second half of February, positive correlation returned at the beginning of this month (and continues), which suggests that reversal of the ratio will translate into lower values of the metal in the coming days.

Summing up, although crude oil closed the previous week above both medium-term resistance lines, the last week's upward move materialized on tiny volume, which in combination with the proximity to the 200-day moving average, an invalidation of the breakout above the 61.8% Fibonacci retracement, the current situation in the oil-to-silver ratio and the position of daily indicators (in light crude and the ratio) could encourage oil bears to act and result in a reversal in the coming week.

Very short-term outlook: mixed with bearish bias

Short-term outlook: mixed with bearish bias

MT outlook: mixed

LT outlook: mixed

Trading position (short-term; our opinion): No positions are justified from the risk/reward perspective. We will keep you informed should anything change, or should we see a confirmation/invalidation of the above.