The rapid collapse in Nymex oil prices caught many investors offguard, and the worst may not be over, with charts suggesting further declines ahead.
Crude oil prices have tumbled over the past six months amid a supply glut and waning demand, sending prices to their lowest levels in six years. The relentless decline led many banks to reduce their price forecasts including Goldman Sachs, which last week cut its three-month price outlook for WTI crude to $41 per barrel from $70. If charts are anything to go by, the reduced price forecasts are warranted.
Best seen on a monthly chart, let's examine the price behavior from a technical perspective. Nymex oil trades in broad trading bands that define its trending behavior. The trend in the oil price decline from near $100 to below $48 per barrel in January has been interrupted by consolidation pauses near each of these trading band levels. This is a strong downtrend, so the consolidation pauses have been 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. Support near $68 was weak, so prices fell quickly to $58. Support near $58 was very weak, and the next support target near $48 was quickly reached. Some consolidation has developed near the $48 level.
The monthly NYMEX oil chart shows eight significant levels of support and resistance levels that define the price decline and the way the downtrend develops. These levels will also define the way any rally and new uptrend develops in the future.
The first five levels are near $98, $88, $78, $68 and $58, respectively.
The sixth level, which is a stronger support and consolidation level, is near $48. This level is the upper edge of a historical consolidation band between $38 and $48. The seventh support level is near $38; traders should watch for consolidation to develop between $38 and $48. In the six months from July to December 2008 the oil price fell from $146.65 to $32.40. Another six-month fall from near $100 in August 2014 to $38 in the next several weeks is also possible.
Failure of support near $38 has the eighth support level near $26.This is a very long-term support and resistance level starting in 1996 that was tested in 2000, 2001, 2002 and 2003. There is a low probability the price will fall to this support level.
Currently the oil chart does not show any trend reversal or consolidation patterns, so investors should prepare for a continuation of the price downtrend.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders – www.guppytraders.com. He is a regular guest on CNBCAsia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.