Rally and Retreat Define Oil Markets: Chart

The weekly chart of the NYMEX oil price is going nowhere. It remains largely impervious to the endless crisis in the Middle East and even the gusting winds of Sandy, one of the biggest storms to hit the United States.

Major disruptions do have a short-term impact on price, but these remain relatively small. It reflects a market that is slowly catching up to the changed reality of oil markets.

The changed reality is that U.S. is no longer as dependent on oil from the Middle East as it was in the past. With oil tapped in shale oil deposits the U.S. is now a net exporter of oil – a far cry from the days of oil dependency.

This new found freedom is partly what drives the more aggressive U.S. approaches to Iran, and its lower levels of concern about Middle East political disruption. Events that in the past had an oil dependant nation putting itchy fingers on the trigger are no longer as significant.

The chart activity of NYMEX oil over the past two years shows a stable market with good support and limited upside. This is a market that has tracked sideways for almost two years, riding out natural and political storms.

The strongest support level is near $78. This is a long term support level that has been successfully tested as support many times.

The weekly chart shows that the defining feature of the oil market is rally and retreat behaviour within a very wide trade range. Uptrend rallies continue for three to six months.

The retreats are more rapid and continue for one to three months. These rallies do not develop into long-term up-trends. There is no strong directional bias, although there are more bullish and more bearish periods where the market moves to the extremes of the trading range.

Strong Support, Strong Resistance

The NYMEX oil market is 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 the price moves above $100 then the trading band width remains around $10 and this puts the next resistance level near $110. The market has shown extreme reluctance to move consistently above $110.

The move from $88 to $110 gives a 25 percent return. The rally from $78 towards resistance near $98 also gives a 25 percent return. These are good trading returns and they make the NYMEX oil market attractive for traders.

The primary danger for trading this market is the volatility of price retreats from resistance levels. Rapid price collapses occurred in 2011, May and 2011 August. The fall from near $105 to $78 between 2012 May and 2012 June, and from $100 in September to $88 in October are typical of the fast volatility retreats. Traders apply a stop and reverse trading strategy in this type of range bound market.

The key trading decision points appear when the price approaches one of the support or resistance levels. In the hurricane driven rally, the key decision point is the narrow resistance band between $98 and $100. Bullish consolidation around this level indicates an increased probability of a breakout towards $110.

Bullish consolidation occurs when the price moves above $100 and then moves sideways using the $100 level as a support level as it did in early 2012.

The current activity is part of the pattern of rally behavior rather than a long-term trend change so traders will tighten stops to protect open profits.

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 [e-mail].

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