Chart: Here’s how to trade oil’s breakout

A gas flare is seen at an oil well site outside Williston, N.D.
Andrew Burton I Getty Images
A gas flare is seen at an oil well site outside Williston, N.D.

With Nymex rebounding 40 percent since its lows of the year hit in March, many are asking if the uptrend is here to stay or whether this is a mere short-term bounce.

Technical analysis suggests that a new trend change emerged earlier this month when the price closed above $58 and the trend will be confirmed if the price manages to stay above that resistant level.

The current uptrend is fast moving so there is a high probability of a consolidation pause developing around the $58 level before the up trend continues. There are three significant resistance levels above $58 ($68, $78 and $88) and these will influence the nature of the developing uptrend.

The $88 resistance level is the lower edge of the long term support level for oil that has influenced the market from October 2011 to October 2014. This means that $88 will now act as a very strong and significant resistance level. These support and resistance levels also define the limits and barriers to any future new rally and uptrend development.

The fall in oil from $98 last year to $45 in January was very rapid with short-lived consolidation or pauses near each of the significant support or resistance levels. The absence of consolidation pauses at these support levels when the price was falling suggests that these levels will offer weak resistance for the new rising price trend. This suggests the consolidation near $58 will be short-lived before a new rally from $58 to the next resistance level near $568.

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On the daily NYMEX oil chart the Guppy Multiple Moving Average (GMMA) indicator shows the short term group of averages has compressed and moved above the long term group of moving averages. The long term GMMA group of averages has also compressed and turned up. The long term group of averages is beginning to expand. This shows investors are becoming strong buyers. This behavior is necessary for the continuation of any new uptrend. The long term group of averages indicates the thinking of investors.

Investors and traders watch for the future GMMA relationship to develop to fully confirm a sustainable uptrend is developing. Currently the lower edge of the long term GMMA is near $54. When the value of the lower edge of the long term GMMA is above $58 then the strong uptrend is fully confirmed.

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 CNBCAsia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.