Charting Asia

NYMEX Crude an Attractive, but Volatile Bet: Chartist

The weekly chart of the NYMEX crude oil price shows a double bottom rebound from $78 a barrel. 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 behavior within a very wide trading range. This is not a trending market. This is a rally and retreat market with the uptrend rallies continuing for five to six months.

The retreats are more rapid and continue for two to three months. These extended rallies do not develop into long term up trends. The NYMEX oil market is defined by strong support and resistance features. They are 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 price moves above $100 then the trading band width remains around $10 and this puts the next resistance level near $110.

The six-month move from $88 to $110 gives a 25 percent return. The current rally from $78 towards the next resistance target 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 May 2011 and August 2011.

The fall from near $105 to $78 between May 2012 and June 2012 is another example of the fast volatility retreats.

For traders this calls for the application to tight stop loss methods to protect open profits. Traders will also switch rapidly from long positions to short positions and apply a stop and reverse trading strategy.

The key trading decision points appear when the price approaches one of the support or resistance levels. In the current 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.

Bearish consolidation occurs when the price moves up to the $100 level and then moves sideways using the $100 level as a resistance level. This increases the probability the market will collapse and retest the next support level near $88.

In the next several weeks traders will watch for the nature of the price activity as prices moves towards the $98 to $100 resistance consolidation level. 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 – He is a regular guest on CNBC's Asia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.

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