There are two important changes in the price behavior of oil. Forget about the current sabre rattling in the Gulf of Hormuz. That will cause some temporary rally spikes but this is within the context of a change in the oil trend environment. These rallies and retreats provide short term trading opportunities but longer-term traders are well positioned on the long side.
The first and most important change is in the relationship with the The indicator is made up of two groups of averages. The long-term group is used to infer the behavior of investors.
The short-term group tracks the inferred behavior of traders. The compression, crossover and separation characteristics provide significant information about trend changes and trend sustainability.
The short term GMMA, shown in blue, has moved above the long term GMMA and maintains good separation. This shows strong bullish support from traders. The long-term group in red has turned up and also begun to separate, showing increasing support from investors.
This is the first time since June 2011 that the short-term group has been above the long-term group. This is a significant change in the trend relationship and points the way to higher prices.
The long-term group of averages provides a support base for any priced retreat. This behavior was seen in February 2011 just prior to the rapid rise from $88 to $115 a barrel.
The second change is the move above the psychologically critical $100 level. This is a nice round number and media is fixated on this level although technically the main resistance level is near $98. The support resistance band between $98 and $100 is a powerful feature of oil pricing. A move above $100 changes the nature of price behavior.
When the oil price is below $100 the volatility and activity is relatively subdued. When the oil price moves above $100 the volatility increases and there is a greater potential for bubble behavior to develop. Oil typically moves in $12 to $14 rally bands above $100. A breakout above $100 brings a new resistance factor into play.
Trend line A acted as a support level from September 2010 until June 2011. The move below the trend line A saw the line act as a resistance level. Trend line A is projected forward into the future. This line will act as a new resistance level and cap 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.
If a strong breakout were to develop in the next week the price target is near $115. If the breakout above $100 is delayed for several weeks, then the price target is slightly higher, around $120. These breakout projection targets are consistent with the way oil price volatility develops after a move above $100.
These are rally targets and they may be driven by changes in the Gulf of Hormuz. Once the resistance level is reached then price will retreat, signaling a good time to take long side profits.
The chart and the GMMA relationships, suggests there is a high potential for the oil price to consolidate in the $98 to $100 region prior to a strong breakout with initial upside targets provided by the value of the long term trend line A.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders –. 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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