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Amid oil’s tumble, charts suggest further downside

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U.S. crude oil fell to a fresh five-year low on Monday, starting December on a downbeat after November marked the fifth consecutive month of decline – oil's longest losing streak since 2008 – and charts suggest further downside ahead.

A strong U.S. dollar, increased U.S. production and weak demand have driven global oil prices to multi-year lows over the past few months. Last week, the Organization of Petroleum Exporting Countries decided not to cut oil output, fueling further price declines.

Developments in the Ukraine still have the potential to affect oil and energy supplies in Europe, but the market has essentially discounted this unless there is a dramatic escalation of the conflict.

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When we last covered oil on October 6, we set a downside target near $78. This target has been exceeded. Speaking on CNBC Street Signs in November, we set a new downside target for oil at $68, which has also been exceeded. The new downside target is near $58.

NYMEX oil trades in broad trading bands; the trending behavior is defined by these bands. The price decline trend from $100 to below $68 was interrupted for consolidation pauses near each trading band, but this is a strong downtrend, so the pauses were brief. When oil moved below $78 there was just a brief consolidation period before the downtrend resumed and moved to the next support level near $68. Some market consolidation has developed around $68, but support is not enough to develop into a trend reversal.

The weekly NYMEX oil chart shows five significant levels of support and resistance that define the price fall and will define how any rally develops in the future: $98, $88, $78, $68 and $58.

The $58 level was a support level in December 2005 and from November 2006 to March 2007. This level did not act as a strong support in November 2008 when oil prices plunged to $32.40, nor did it act as resistance in May 2009 when prices rallied above $58.

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The next strong support and consolidation level is near $48. This is the longer-term downside target for oil. Remember, in the six months from July to December 2008 the oil price fell from $146.65 to $32.40. A fall from near $68 to $48 over a few months is also possible.

The first technical price target is near $58. Traders will watch for consolidation behavior near this level before deciding if the downtrend will continue towards $48. Good consolidation near $58 will provide a floor for a price rally with the first resistance target near $68.