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Chart: The signs you need to go long on oil

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The downside target for oil near $38 was almost achieved in the week of August 29 with a low of $38.24. But there are signs of hope for higher prices.

But the rebound rally from $38.24 was fast and strong, which suggests the downward pressure in oil is weakening. Traders are now alert for the development of patterns that signal the end of the downtrend.

There are three significant levels on the weekly chart; support resistance levels near $58, $48 and $38. A sustained move below $38 has a downside target near $28 but there is a low probability price will move below $38.

Instead, the pattern of price development that started around March 2015 has the potential to develop into a inverted head and shoulder pattern. This type of pattern is a reliable indication of a change in the direction of the trend. The chart pattern development is best seen on a weekly chart.

The price activity for this pattern is currently developing and the full pattern might not be completed for several weeks. Most key, when the pattern is not confirmed, we should use this analysis with caution.

The left shoulder of the pattern is created by the lows of January and March 2015 (Area A.) This double dip behavior to create an inverted head and shoulder pattern is unusual.

The left side base of the neck is created by the rally and consolidation in May to July 2015 (Area B.) This consolidation developed around the $58 support and resistance level.

The head of the pattern is created in the week of August 29 with the dip to $38.24 and the quick rebound (Area C.) This has the behavior of a exhaustion sell-off.

The key feature is that this demonstrates the future development of the current rally.

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Three future features are now needed to confirm the inverted head and shoulder pattern. They are shown with the thick black lines on the chart. The first feature is a continuation of the current rally with a move above $48 towards historical resistance near $58 (Area D.)

The second feature is a rally collapse and a re-test of the $48 area as a support (Area E.)

The third feature completes and confirms the head and shoulder pattern; another rally away from support near $48 and a move above resistance near $58.

The neckline of the pattern is between points B and D. When point D is confirmed then the depth of the pattern is measured and projected upwards to set the first uptrend breakout targets. Traders will watch for future confirmation of the pattern because this will be a signal to go long on oil.

Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders, available at www.guppytraders.com. He is a regular guest on CNBC Asia Squawk Box and a speaker at trading conferences in China, Asia, Australia and Europe.