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Ukraine tensions boost oil but resistance is strong

As months of protests in the Ukraine come to a head following the recent ousting of President Yanukovych and Russia's occupation of Crimea, geopolitical tension has accelerated the rally in Nymex oil prices that started in the week of January 18.

While crude continues to edge higher, with prices touching a five-month high on Monday, charts indicate that this is a short-term rally in the environment of a slow longer-term uptrend, and suggest the upside for the current rally is around $110.

(Read more: US oil ends shy of $105; Ukraine risk feeds rally)

The weekly Nymex oil chart shows an uptrend starting in June 2012, demarked here by uptrend trend line A. The best placement of the trend line starts near $81 and connects the lows in November 2012 and April 2013, providing three anchor points.

The rebound in January 2014 confirms the trend line's position, showing a steady slow-moving uptrend.

The weekly Nymex oil chart shows four levels of support and resistance near $78, $88, $98 and $110 respectively.

(Read more: Russian energy a threat to Europe, but not the US)

Oil has traded in a sideways band between $88 and $98 since July, 2012. The breakout above this trading band in July, 2013 was not the start of a new uptrend but rather a temporary rally towards resistance near $110.

The current rally breakout above $98 displays the same pattern of behavior, suggesting there is a high probability that resistance will again be strong near $110.

A unit claiming to Cossack and other citizen pro-Russian volunteers arrive to take up position outside a Ukrainian miltary base where heavliy-armed unidentifed soldiers have surrounded Ukrainian soldiers inside as Russian flag flies behind in Crimea on March 3, 2014 in Perevalne, Ukraine.
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A unit claiming to Cossack and other citizen pro-Russian volunteers arrive to take up position outside a Ukrainian miltary base where heavliy-armed unidentifed soldiers have surrounded Ukrainian soldiers inside as Russian flag flies behind in Crimea on March 3, 2014 in Perevalne, Ukraine.

Traders will trade from the long side as the rally moves upwards and take profits when the rally moves towards resistance near $110. There is a high probability the price will quickly retreat from resistance, so traders will be ready to take short-side trading positions. The downside target for the retreat from resistance is near $98.

Uptrend line A shows there is long-term bullish pressure for oil prices. This is a slow moving uptrend, so the probability of a very fast breakout above resistance near $110 is low.

(Read more: Ukraine, Russia skirmish has global shockwaves)

The pattern of support and resistance on the Nymex oil chart suggests that in the long term the oil price will develop range-bound trading behavior between $98 and $110. Any fall below support near $98 will find good support from the value of trend line A.

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.

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

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