Are We Looking at a Dead Cat Bounce in Oil?

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Published : May 29th, 2019
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Category : Opinions and Analysis

Oil bulls look to have arrested the slide as there hasn't been a down day since Thursday. One could easily expect a more vigorous rebound, however. The nearby resistances remain and black gold has hardly gone anywhere today so far. After the long weekend, will the bulls muster more strength, or does the technical picture favor another trip south in the coming days? The answer isn't as easy as might be inferred from the Alert's title...

Let's take a closer look at the charts below (charts courtesy of http://stockcharts.com).

The first thing that catches the eye on the weekly chart, is the latest long red candle. It marks crude oil having moved sharply lower in the previous week. Black gold closed not only below the previously-broken 61.8% Fibonacci retracement, but also below the 50-week moving average.

This is certainly a bearish development. The weekly indicators' sell signals remain on the card, supporting the bears and lower prices in the coming week(s).

Comparing the conviction of the bulls and bears, we see that the volume of the downswing was higher than the volume of the preceding upswing. This shows increasing involvement of the bears, and also supports lower prices down the road.

The daily perspective shows crude oil having moved a bit higher after Thursday's landslide. The upswing of several trading sessions invalidated the earlier breakdown below the lower border of the declining blue trend channel and the dashed green support line (based on late-March lows).

Although this is a positive event for the bulls, we should keep in mind that they haven't reached even the 38.2% Fibonacci retracement (based on the last week's decline). This increases the likelihood of seeing another downswing in the coming days. Especially so, when we factor in the weekly picture of the commodity and the similarity to the recent past. Let's quote our Friday's Alert:

(...) Crude oil has created a similar gap in November 2018 - that's not too far from yesterday's gap. Back then, oil bears also created a long red candlestick on very high volume (it's marked with a blue vertical line). There was an attempt to repair the damage in the following days but the bulls' efforts failed after a few days, and light crude declined again.

Will the history repeat itself? It's quite likely. There's also one more thing speaking for the bears today - back then, the Stochastic Oscillator supported the buyers, now it visibly favors the sellers.

How low could the oil price go next? Let's remember once more our Friday's Alert:

(...) If the commodity extends losses from here, we could see a drop even to around $53.50, where the size of the decline corresponds to the height of the channel.

But the first target for the sellers will be a bit higher - at around $54.70, where the size of the downward move equals the height of the rising red wedge (as marked with yellow rectangles).

This is the area marked by the 50% Fibonacci retracement, the late-February and early-March lows. They together create the green zone serving as the next important support for the bulls.

Summing up, the outlook for oil is bearish. After the Wednesday and Thursday's sessions that have shaken the oil market, the bulls have been unable to engineer a fast price recovery. Black gold is still trading beneath important short-term resistances, its rebound from the lower border of the declining blue trend channel and the dashed green support line. The weekly indicators and volume comparison continue to support lower prices and the picture concurs. The short position continues to be justified.

If you enjoyed the above analysis and would like to receive daily premium follow-ups, we encourage you to sign up for our Oil Trading Alerts also benefit from the trading action we describe. We encourage you to sign up for our daily newsletter, too - it's free and if you don't like it, you can unsubscribe with just 2 clicks. If you sign up today, you'll also get 7 days of free access to our premium daily Gold & Silver Trading Alerts. Sign up for the free newsletter today!

Thank you.

Nadia Simmons
Forex & Oil Trading Strategist
Sunshine Profits - Tools for Effective Gold & Silver Investments

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Przemyslaw Radomski is the founder, owner and the main editor of www.SunshineProfits.com. Being passionately curious about the market’s behavior he uses his statistical and financial background to question the common views and profit on the misconceptions. “Don’t fight the emotionality on the market – take advantage of it!” is one of his favorite mottos. His time is divided mainly to analyzing various markets with emphasis on the precious metals, managing his own portfolio, writing commentaries, essays and developing financial software. Most of the time he’s got left is spent on reading everything he can about the markets, psychology, philosophy and statistics. Mr. Radomski has started investigating the markets for his private use well before starting his professional career. He used to work as an informatics consultant, but this time-consuming profession left him little time for his true passion – the interdisciplinary market analysis. Establishing www.SunshineProfits.com gave him the opportunity to put his thoughts, ideas, and experience into form available to other investors.
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