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Why US Crude Will Find It Difficult to Breach $100

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Technically it is difficult to get excited about oil. OK there has been a 25 percent move from support near $78 a barrel to resistance near $98 in NYMEX crude. That's good for traders and a challenge for hedgers, but in today's markets, this rise is nothing to write home about.

The higher probability rally pattern from $88 to $98 only delivers a gain of 11 percent. Put that next to NASDAQ and S&P performances and it looks a little ordinary.

It's the weekly oil chart that puts short term hysteria and hype into context. The last time oil moved above $100 was in February 2012 and that was a limited run to $110 that ended in May 2012. It was the last knee jerk reaction of a market that had failed to recognise the fundamental shift in oil pricing created by the shale oil revolution in the United States.

(Read More: Industrial Production Drops 0.1% on Weak Manufacturing)

Major disruptions, civil, climatic and military do have a short term impact on price, but these impacts remain relatively small and they are constrained by the well defined support and resistance levels. With oil flowing from shale oil deposits, the U.S. is now a net exporter of oil.

(Read More: Oil Rally Could Fade If Fed Hints at Policy Pause)

The message is clear. The speculative money has moved out of oil in search of better risk and reward metrics.

The chart activity of NYMEX oil over the past two years shows a stable market with good support and limited upside despite revolutions in the Middle East, kidnappings and hurricanes. This is a market that has moved sideways for almost two years and chart analysis must recognise this behavior. This is a sludge market with slow moves.

The strongest support level is near $78. This is a long term support level that has been successfully tested as support in October 2011 and again in June 2012.

The weekly chart shows that the defining feature of the oil market is rally and retreat behavior within a very wide trade range between $78 and $98. Uptrend rallies continue for three to six months. The retreats are more rapid and continue for one to three months. The current rally has been in place for just over three months. The recent historical character of oil trading suggests this rally will soon rapidly collapse over a 6-9 week period.

The NYMEX oil market is strongly defined by strong support and resistance features 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 market continues to show extreme reluctance to move consistently above $110.

Traders are building short positions in anticipation of a retreat from the $98- $100 level. A simple stop and reverse trading strategy in successful in this type of range bound market.

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.

If you would like Daryl to chart a specific stock, commodity or currency, please write to us at ChartingAsia@cnbc.com. We welcome all questions, comments and requests.

CNBC assumes no responsibility for any losses, damages or liability whatsoever suffered or incurred by any person, resulting from or attributable to the use of the information published on this site. User is using this information at his/her sole risk.

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  • Daryl Guppy is an independent technical analyst who appears frequently on CNBC Asia.

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