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Oil's Next Target May Be Rapid Move to $112: Charts

Tuesday, 1 Mar 2011 | 10:54 PM ET

Oil continues to be the front and center of investors' focus this week, with nymex crude surging beyond the $100/barrel mark as unrest in the Middle East sparks concerns about possible supply disruptions.

There are six significant factors to bear in mind as we examine the West Texas Intermediate (WTI) price chart.

  • This is a momentum-driven rally created by the unfolding events in the Middle east.
  • When the immediate impact of the unrest disappears, oil will return to its long-term trend behavior
  • The up trend in oil started in August 2010.
  • The $100 price level is a very important psychological barrier in the market.
  • Trend and resistance behaviour creates a powerful chart pattern.
  • The nature of the oil price trend changes when prices move above $100.

The first feature is the rally and this is created by a rapid up move in prices. A rally is a fast up move in prices. The rally often ends with a very rapid collapse of prices to the long term trend line.

The return to the long term up trend line is the second significant feature of the oil price behavior. There is a low probability the direction of the market will change when the rally collapses.

Analysis of the chart shows the up trend line started in August 2010, which is the third most important feature in the current market. The strength and importance of the trend line was tested again in January 2011 when the price dipped below support near $88 and then rebounded.

$100 - as a psychological barrier - means the next price move after busting the level would be very rapid. The oil price when tend to consolidate between the $98 and $100 level.

The combination of the up trend line and the resistance areas creates an up sloping triangle pattern. This is the fifth feature of this developing market and it is bullish. The breakout above the resistance level unleashes a surge of bullish buying. But this pattern does not predict the events which are currently driving the price rally. The pattern points the way to market conditions that are more conducive to this type or reaction when events develop. The current momentum rally towards $100 is the first part of the up triangle breakout behavior.

The final feature of the oil market is the change in behavior when oil moves above $100. The market develops more momentum behavior and price moves more rapidly upwards. The oil price activity is dominated by support and resistance bands. When the price is above $100 the width of the trading bands increases to around $12. This gives targets of $112, $124 and in the longer term, $136.

The behavior around the $100 price level is a critical tipping point for the oil price. The immediate crisis in the Middle East may recede but the long term oil trend shows continued bullish pressure. The end of the bullish pressure is shown by close below the up trend line.

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. He is now also on Facebook.

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