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The weekly chart of the NYMEX crude oil price
shows a double bottom rebound from $78 a barrel. This is a long term
support level that has been successfully tested as support many times.
The
weekly chart shows that the defining feature of the oil market is rally
and retreat behavior within a very wide trading range. This is not a
trending market. This is a rally and retreat market with the uptrend
rallies continuing for five to six months.
The
retreats are more rapid and continue for two to three months. These
extended rallies do not develop into long term up trends. The NYMEX oil [CLCV1
92.89
0.47
(+0.51%)
] market is defined by strong support and resistance features. They are located at $78, $88 and $98.
0.47
(+0.51%)
] market is defined by strong support and resistance features. They are located at $78, $88 and $98.
The
psychological resistance level is at $100 so the market uses the $98 to
$100 level as a support/resistance consolidation area. When price moves
above $100 then the trading band width remains around $10 and this puts
the next resistance level near $110.
The
six-month move from $88 to $110 gives a 25 percent return. The current
rally from $78 towards the next resistance target near $98 also gives a
25 percent return. These are good trading returns and they make the
NYMEX oil market attractive for traders.
The
primary danger for trading this market is the volatility of price
retreats from resistance levels. Rapid price collapses occurred in May
2011 and August 2011.
The fall from near $105 to $78 between May 2012 and June 2012 is another example of the fast volatility retreats.
For
traders this calls for the application to tight stop loss methods to
protect open profits. Traders will also switch rapidly from long
positions to short positions and apply a stop and reverse trading
strategy.
The
key trading decision points appear when the price approaches one of the
support or resistance levels. In the current rally the key decision
point is the narrow resistance band between $98 and $100. Bullish
consolidation around this level indicates an increased probability of a
breakout towards $110.
Bullish consolidation occurs when the price moves above $100 and then moves sideways using the $100 level as a support level.
Bearish
consolidation occurs when the price moves up to the $100 level and then
moves sideways using the $100 level as a resistance level. This
increases the probability the market will collapse and retest the next
support level near $88.
In
the next several weeks traders will watch for the nature of the price
activity as prices moves towards the $98 to $100 resistance
consolidation level. Traders will tighten stops to protect open profits.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders –www.guppytraders.com . He is a regular guest on CNBC's Asia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.
If you would like Daryl to chart a specific stock, commodity or currency, please write to us at ChartingAsia@cnbc.com.
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