Charts: Before oil's next big move, more consolidation

The oil storage depot at Indonesian oil company Pertamina in Jakarta
Beawiharta | Reuters
The oil storage depot at Indonesian oil company Pertamina in Jakarta

Nymex oil prices rose over 5 percent on Monday as the framework deal reached on Tehran's nuclear program last week offers little chance for a near-term increase in oil exports, but charts suggest it's too early to expect any meaningful price rise.

The framework reached on Tehran's nuclear program lays the path to the eventual removal of sanctions on Iran's crude oil exports, which have fallen by more than one million barrels per day since sanctions were levied in 2012. But analysts say that an increase in Iranian exports is unlikely to hit the market until 2016, putting a tailwind behind prices.

NYMEX oil has been hovering around the $48 support level for several months. Oil first developed a rebound from the low of $44.45 after falling below support near $48. The second fall below $48 developed a rebound from the low near $43.46. This lower low is not evidence of a continuation of the downtrend, however. Oil is developing a consolidation pattern around the $48 level. The upper edge of the consolidation pattern is near $53.53. The lower edge of the consolidation pattern is near $43.456.

NYMEX oil trades in broad trading bands that define the trend behavior. The fall in oil was very rapid with short-lived consolidation or pauses near each of the significant support or resistance levels. These support and resistance levels also define the limits and barriers to any future rally and uptrend development.

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Oil continues to move in a consolidation a between support near $48 and resistance near $58. On the daily chart (not pictured), the Guppy Multiple Moving Average (GMMA) indicator shows the short-term group of averages testing the lower edge of the long-term group of moving averages. It has tested this level four times starting 2015 February. The long-term group of averages indicates what investors are thinking. This group of averages is beginning to compress but it has not yet begun turn upwards. This shows investors have stopped the heavy selling. Investors are not yet strong buyers. This behavior is necessary before any new uptrend can develop.

Investors and traders should watch for this future GMMA relationship to develop to confirm a new uptrend is developing. They watch for the short-term group of GMMA averages to compress and move above the upper edge of the long-term group of GMMA averages. The upper edge of the long-term GMMA is near $50 and below historical resistance near $58. Investors watch the GMMA behavior during the retreat away from resistance near $58. The retreat should retest the lower edge of the long-term GMMA and then rebound from this support level.

The development of the new uptrend starts when the oil price moves out of the consolidation band. The development of a new uptrend in oil is confirmed when the price is able to stay above resistance near $58.

Strong and fast downtrends normally do not quickly reverse direction, so there is a high probability of a period of consolidation activity between $48 and $58 that may also last several months. This consolidation band provides a rally and retreat trading environment suitable for traders. Investors should wait for a sustained breakout above $58 shown on the weekly NYMEX before they join the new long-term uptrend.

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.