Oil prices continued to weaken and make fresh multi-year lows as concerns grow for the Chinese economy. Over the last 10 years, China has been responsible for 45% of the total growth in global oil demand. As China slows (GDP growth falling from 10% to 7%) and demand falls for oil demand, we could see the longer-term bearish trend remain firmly in place. With global production remaining steady, we could see another major drop if the psychological $40 handle is taken out.
Price action on the oil weekly chart shows 10 consecutive bearish candles that is tentatively respecting the $40.50 level. With the commodity heavily into oversold territory, we could see a bounce here before seeing price resume its bearish trend.
Initial support could come from $34.06, which is the 141.4% Fibonacci expansion level of the March to May rally. A deeper selloff could find major support from the 2009 low of $33.20.
If we see bullish momentum return and maintain consecutive weekly closes above the $47.50 area, we could see an extended consolidation phase with a short squeeze welcoming a couple drives above the psychological $50 handle.
The trade: Sell oil at $42.50, with a stop loss at $45.50 and take profit at $34.50. The risk/reward ratio is 3:8
Edward J. Moya
Senior Market Strategist
WorldWideMarkets Online Trading