Charting Asia

Oil on the Roil — Handle with Care

Oil prices have more than doubled since the near $30 lows this past winter, tracking the stronger equities markets. Will crude continue to be hot, or are we in for a cold spell?

Technically, there are two analysis applications we can apply to oil as the price continues to boil. Both suggest boiling oil needs to be handled with care.

The first analysis is based on historical support and resistance analysis. It provides one set of targets and conclusions. The second analysis is based on analysis and price projections. The application of both analysis methods is best seen on a weekly chart because this dulls the howls and shrieks of daily volatility.

We start with historical support and resistance analysis. The long price rise in oil from 2007  and into 2008 was punctuated with well defined support and resistance levels. During the steady rise, we used these methods to establish the next price targets.

The sharp fall in the oil price largely ignored these historical support and resistance levels. The current rise is respecting these levels. The lower of these resistance levels is near $53. The rises in April 2009 were capped at this level. The rise respected, or observed, these resistance points, reacting away from these levels before developing a successful breakout.

The next long term and established resistance/support area at $56 also provided a temporary pause and consolidation area before the recent successful breakout. The price rise continues to respect the historical support areas.

The $68 and $70 level is a long-term support and resistance area. This was a dominant resistance area in 2005, 2006 and then a support area in 2006 and 2007. This is a strong long-term feature and this suggests there is a higher probability oil will consolidate in this area.

If oil goes off the boil, then the price collapse will retest the support area near $57, and potentially as low as $53. This style of analysis provides a trading range for the collapse of the current oil bubble.

A continuation of the oil bubble would see a rise above $70. The longer term upside target is near $86. There is a minor resistance level near $76.

The second analysis method looks at the similarity in oil price behavior and the behavior of other markets, such as the KOSPI, Hang Seng, Straits Times Index and the Sensex.

These markets all have common features. It starts with the development of a or equilateral triangle pattern. The breakout from this pattern initially failed. The lower and upper edges of the equilateral triangle pattern then defined the limits of a trading band. The height of this trading band is measured and the value projected upwards to set a target for the breakout above the upper edge of the trading band. The KOSPI, Hang Seng, STI and Sensex have all achieved these trading band projection targets and are now beginning to  develop momentum weakness.

The oil price trading band projection target is near $81. The reliability of the trading band projection targets in regional markets suggests there is a high probability the oil price breakout will also reach these projection targets near $81. This target does not correspond with any historical support and resistance level and this would usually reduce the reliability of the projection target.

The behavior of associated markets with similar trading band breakouts provides a leading indication of the oil price behavior as it moves towards the trade band targets. A strong retreat from the projection targets for the KOSPI and other markets provides a high probability that oil will behave in the same way as it approaches the trade band target near $81. It is too early to determine if this inter-market relationship is correlated or just coincidental. However it cannot be ignored.

There is a strong probability oil will continue to show price volatility within the context of the historical support and resistance levels. There is a low probability oil will move below the upper edge of the trading band near $57 so any retreat in the oil price is temporary.

There is a  igh probability of an extended period of trend consolidation with rebound and retreat behavior between $57 and $77. This takes oil off the boil but suggests price will continue to roil providing trading opportunities in volatile behavior.

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