Charting Asia

Oil prices face further downside: Charts

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Nymex crude oil fell below $90 per barrel for the first time in 17 month last week amid signs of a supply glut, and charts suggest further downside.

Prices dropped amid signs that supply will outpace slowing demand from China and Europe. In September, the International Energy Agency (IEA) cut its 2015 oil demand forecast by 165,000 barrels per day. Meanwhile, the IEA forecast U.S. oil production to reach its highest level since 1970 next year, while Saudi Arabia, the world's biggest oil exporter, cut prices for its crude oil last week amid slack demand.

Nymex oil has been trading in a broad band between $88 and $110. The weekly chart shows an uptrend starting June 2012 – trend line A, which starts near $81. Trend line A connects the lows in November 2012 and the low in April 2013 – three anchor points for the uptrend line. The rebound in 2014 January confirms the position of trend line A, which is a steady, slow-moving uptrend.

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Prices fell below trend line A in July 2014, signaling a significant trend change. The long-term uptrend collapsed. The trend line began acting as a resistance level, capping any rally rebound. This will define oil price behavior in coming weeks.

The weekly NYMEX oil chart shows four levels of support and resistance: $78, $88, $98 and $110.

Starting in July 2012, oil has traded in a sideways band between $88 and $98. The breakout above this trading band in July 2013 was not the start of a new uptrend, rather a temporary rally towards resistance near $110.

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This consistent movement between support and resistance within the trading bands suggests that the current downside target is near $88. Any rally from this level will be limited by the value of trend line A acting as a resistance level. This value is currently near $96.

Failure of support near $88 has a downside target near $78. Traders will wait to see how support consolidation develops near $88 before taking new positions.

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 CNBCAsia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.