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The Next Target for Oil is $124: NYMEX Chart

Tuesday, 3 May 2011 | 7:36 PM ET

Macbeth says “We have scotched the snake, but not killed it” and the same can be applied to the death of Osama bin Laden. This is a psychological victory. Its not of the same order as the removal of a head of state who has executive control of an organized military.

The initial jubilation will create some rallies and some rapid declines, but these are not enough to change the direction or nature of the underlying trend. Look for volatility in oil, but not a trend change.

The initial jubilation will create some rallies and some rapid declines, but these are not enough to change the direction or nature of the underlying trend. Look for volatility in oil, but not a trend change.

The oil price is the foundation for inflation. The NYMEX oil chart shows the next target for oil is near $124. The chart also shows a new pattern of price behavior. This pattern often ends with a sudden price retreat and Osama bin Laden’s death may be enough to create these conditions.

When oil is trading below $100 the pattern of support and resistance is consistent. The support and resistance bands are around $10 wide. The technical upside target for oil was $98 but the psychological resistance target is $100.

When oil moves above $100 the behavior of the market changes. The first change in behavior is an increase in volatility. The price moves up and down more rapidly than when oil is below $100.

The second change in behavior is an increase in the width of the support and resistance bands. This is now around $12. The first trading band target is measured from the psychological resistance level at $100 and gives an upside target near $112. This has been achieved. The second upside target is $12 higher near $124.

The normal behavior is for a consolidation to develop near the first resistance level at $112. After the consolidation is completed there is a rapid rise to the next target level at $124.
The oil price has developed a different pattern after the first rally to $105. This is an upward sloping flag pattern. This is not a bearish pattern.

This pattern is a typhoon flag pattern. The pattern is defined by two parallel up sloping trend lines. When the lower trend line value is above the high of the flagpole near $105 then the typhoon pattern is confirmed. The value of the trend line moved above $105 in the last week.

The typhoon flag pattern is a trend continuation pattern. It is not used to calculate any up side targets. This pattern confirms the increased probability the oil price will continue to rise to $124.

The typhoon flag pattern often ends with a very sudden price fall. The sell signal for this pattern is a move below the lower edge of the flag trend line. Current value is near $107. A move below this level would signal a rapid fall in oil prices, but this does not mean prices develop a new downtrend.

The support level between $98 and $100 is very strong. The long-term uptrend that started in 2010 June is also strong. The value of this up trend line is near $93. Oil could fall to $93 and still remain in the long-term uptrend.

In the short term oil is moving towards the target at $124. In the longer term, oil continues in a uptrend even if there is a price correction back to $100 or $93.

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.

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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