Understanding crude oil behavior

On Monday, oil bulls extended gains after Friday's invalidation of the breakout, which together with the buy signal generated by the Stochastic Oscillator suggest further improvement. A least at the first sight. But does watching the room through the keyhole give us a full picture of what's inside? We also think so, therefore, we invite you to analyze a broader picture of crude oil.

Let’s analyze the charts below (charts courtesy of http://stockcharts.com).

On the daily chart, we see that thanks to Friday’s decline the commodity dropped to our first downside target - the 38.2% Fibonacci retracement (based on the August-January upward move), but then rebounded and invalidated the earlier breakdown under this support. As you see, this positive event encouraged oil bulls to act, which resulted in further improvement after the market open.

But did the bulls’ “rally” change anything in the overall picture of black gold? Some of you will likely say that an invalidation of the breakdown under the above-mentioned retracement in combination with the buy signal generated by the Stochastic Oscillator could trigger further improvement.

Of course, such a probability can’t be ruled out, however, focusing only on these two positive factors without looking more closely at the bearish arguments is like watching a closed room through a keyhole. We see only a little piece of a larger image, which can be confusing. Why are we writing about it? Let’s analyze the factors, which oil bears have on their side.

Firstly, light crude increased to the previously-broken 50-day moving average, but then reversed and decline quite sharply, which looks like a verification of the earlier breakdown under this line. Secondly, size of volume, which accompanied yesterday’s increase was visibly smaller compared to what we saw in the previous week during declines. Thirdly, although the Stochastic Oscillator generated the buy signal, the sell signals generated by the RSI and the CCI remain in the cards.

On top of that, let’s recall the most important factor, which justifies the maintenance of short positions (seen on the medium-chart below).

What do we mean? An invalidation of the breakout above the upper border of the green rising trend channel, which materialized on huge volume, increasing the probability of further deterioration.

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