The NYMEX weekly oil chart has developed a mid-trend inverted head and shoulder continuation pattern. This suggests that the uptrend of the past few weeks has a high probability of continuing. The head and shoulder pattern is also used to calculate price targets using a measured move.
Head and shoulder patterns are normally considered reversal patterns occurring at the turns of major trends. This is the way they were used in 2008 and again in 2009. When the patterns occur in the opposite direction to the primary trend, they are usually continuation patterns. The pattern looks out of place.
The inverted head and shoulder pattern is most commonly associated with the end of a downtrend. When the pattern appears in the middle of an uptrend it is unusual and it has different significance. It suggests a continuation of the existing long-term trend and not a trend reversal.
The left shoulder of this pattern developed around the low near $91/barrel in July 2011. The inverted head of the pattern develops around the cluster of lows near $78 in October 2011. The right shoulder is created by the rally and retreat behavior near $94 in December 2011.
These patterns of retreats and rally rebounds combine to create the inverted head and shoulder pattern that follows the fall from the $114 high in April 2011.
The neckline of the pattern is drawn between the high of $99 in July 2011 and the high of $101 in January 2012. The distance between the low of the inverted head and the neckline is measured. This value is projected upwards to give an upside target near $125.
Another important feature on the NYMEX oil chart is the long-term uptrend line. This upwards trend line acted as a support level from September 2010 until June 2011. The move below the trend line saw the line act as a resistance level. The long term up trend line is projected forward into the future.
This line acts as a new resistance level and limits the degree of price rise above the $100 resistance level. The value of this line is used to help determine the potential high points for any breakout rally.
The inverted head and shoulder targets are consistent with the resistance targets set with the long-term uptrend line. These patterns help define the potential limits of any price rises but they do not help to set a time frame for the events.
Although the inverted head and shoulder pattern is reliable, it is not infallible. The pattern is invalidated if the price moves below the neckline value. On the weekly chart this is a close below $101. A close at this level would confirm that the inverted head and shoulder pattern has failed.
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.
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