Trading position (short-term; our opinion): Long positions with a buy limit order at $75.82 and a stop-loss at $73.47 are justified from the risk/reward perspective. Sent to Subscribers November 5, 2014, 10:11 AM

On Tuesday, crude oil lost 1.09% as the combination of soft U.S. data and a European Commission‘s decision fueled concerns over a global demand, pushing the price lower. Additionally, Saudi price move continued to weigh on the commodity. Because of these circumstances, light crude hit a fresh multi-month low of $75.84 and broke below important support levels. What’s next?

On Monday, Saudi Arabia cut its prices for crude oil sold in December in the U.S., which resulted in a daily close below the barrier of $80. This move, fueled fears that that the Organization of the Petroleum Exporting Countries is unlikely to curtail production to reverse the market’s slide. Additionally, yesterday, the United Arab Emirates’ state oil company said it had cut prices in all locations in October, which watered the price as well.

On top of that, the European Commission cut its forecast for euro zone economic growth to 0.8% this year from a 1.2% forecast made in the spring, while the 2015 growth forecast dipped to 1.1% from 1.7%. This decision in combination with soft U.S. data (which showed that factory orders declined by 0.6% in September, weakening optimism over the strength of U.S. recovery) sparked worries that demand will remain soft while supply ample. As a result, crude oil hit a three-year low of $75.84, breaking below important support levels. What’s next? 

(MT Ed Note: To view these two charts in very large format go HERE & click on the chart once, then click arrows at top to expand further) 

(MT Ed Note: To view these two charts in very large format go HERE & click on the chart once, then click arrows at top to expand further)

Yesterday, we wrote the following:

(…) crude oil extended losses, hitting a fresh multi-month low of $78.08 and breaking below the lower border of the consolidation. However, the most important event of yesterday’s session was a daily close below the psychological barrier of $80.

(…) All the above provide us with bearish implications and suggest that light crude will move lower in the coming days.

Looking at the above charts, we see that the situation developed in line with the above-mentioned scenario as crude oil hit a fresh multi-year low of $75.84. With this downswing, light crude dropped not only below the Jun 2012 low of $77.28, but also under the Oct 2011 low of $76.25. In this way, the commodity approached the next downside target created by the Aug 2011 low of $75.71. Taking all the above into account, we believe that our last commentary is up-to-date:

(…) taking into account the above-mentioned breakdown below the lower border of the consolidation, it seems that crude could drop even to around $75, where the size of the downward move will correspond to the height of the formation. At this point, it’s worth noting that below this level there is also the 50% Fibonacci retracement based on the entire 2009-2011 rally (at $74.19), which together create a solid support zone.

Summing up, crude oil extended losses, hitting a fresh multi-year low of $75.71 and breaking below two important support levels. Taking into account the fact that the space for further declines seems limited, we suggest opening long positions when crude oil drops to $75.82 with a stop-loss order at $73.47.

Very short-term outlook: bearish
Short-term outlook: mixed with bearish bias
MT outlook: mixed
LT outlook: bullish

Trading position (short-term; our opinion): In our opinion, long positions with a buy limit order at $75.82 with a stop-loss at $73.47 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.

Thank you.

Nadia Simmons
Forex & Oil Trading Strategist
Przemyslaw Radomski, CFA
Founder, Editor-in-chief